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, 2006

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 a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. Large accelerated filer  x   Accelerated filer  o   Non-accelerated filer  o .

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

The number of shares outstanding of the issuer’s classes of common stock as of July 31, 2006:

Common Stock – 963,488,129 (1)

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

 




WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2006
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, 2006 and 2005

 

 

1

 

Consolidated Statements of Financial Condition –
June 30, 2006 and December 31, 2005 (restated)

 

 

2

 

Consolidated Statements of Stockholders’ Equity and Comprehensive Income –
Six Months Ended June 30, 2006 and 2005 (restated)

 

 

3

 

Consolidated Statements of Cash Flows –
Six Months Ended June 30, 2006 and 2005 (restated)

 

 

4

 

Notes to Consolidated Financial Statements

 

 

6

 

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

 

 

32

 

Cautionary Statements

 

 

32

 

Controls and Procedures

 

 

33

 

Overview

 

 

34

 

Critical Accounting Estimates

 

 

36

 

Recently Issued Accounting Standards Not Yet Adopted

 

 

36

 

Summary Financial Data

 

 

37

 

Earnings Performance from Continuing Operations

 

 

39

 

Review of Financial Condition

 

 

50

 

Operating Segments

 

 

53

 

Off-Balance Sheet Activities

 

 

57

 

Capital Adequacy

 

 

58

 

Risk Management

 

 

59

 

Credit Risk Management

 

 

59

 

Liquidity Risk Management

 

 

63

 

Market Risk Management

 

 

65

 

Operational Risk Management

 

 

68

 

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

 

 

65

 

Item 4.    Controls and Procedures

 

 

33

 

PART II – Other Information

 

 

69

 

Item 1.    Legal Proceedings

 

 

69

 

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds

 

 

70

 

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

 

 

71

 

Item 6.    Exhibits

 

 

71

 

 

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,

 

 

 

    2006    

 

    2005    

 

2006

 

2005

 

 

 

(in millions, except per share amounts)

 

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans held for sale

 

 

$

398

 

 

 

$

580

 

 

$

864

 

$

1,053

 

Loans held in portfolio

 

 

3,884

 

 

 

2,833

 

 

7,460

 

5,448

 

Available-for-sale securities

 

 

368

 

 

 

234

 

 

690

 

457

 

Trading assets

 

 

165

 

 

 

91

 

 

363

 

170

 

Other interest and dividend income

 

 

120

 

 

 

51

 

 

215

 

95

 

Total interest income

 

 

4,935

 

 

 

3,789

 

 

9,592

 

7,223

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

 

1,461

 

 

 

852

 

 

2,682

 

1,548

 

Borrowings

 

 

1,414

 

 

 

928

 

 

2,734

 

1,703

 

Total interest expense

 

 

2,875

 

 

 

1,780

 

 

5,416

 

3,251

 

Net interest income

 

 

2,060

 

 

 

2,009

 

 

4,176

 

3,972

 

Provision for loan and lease losses

 

 

224

 

 

 

31

 

 

306

 

47

 

Net interest income after provision for loan and lease losses

 

 

1,836

 

 

 

1,978

 

 

3,870

 

3,925

 

Noninterest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue from sales and servicing of home mortgage loans

 

 

222

 

 

 

114

 

 

486

 

889

 

Revenue from sales and servicing of consumer loans

 

 

424

 

 

 

2

 

 

801

 

2

 

Depositor and other retail banking fees

 

 

641

 

 

 

540

 

 

1,219

 

1,030

 

Credit card fees

 

 

152

 

 

 

 

 

291

 

 

Securities fees and commissions

 

 

56

 

 

 

47

 

 

108

 

94

 

Insurance income

 

 

33

 

 

 

47

 

 

66

 

93

 

Trading assets income (loss)

 

 

(129

)

 

 

285

 

 

(142

)

186

 

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

 

 

 

 

 

25

 

 

(8

)

(97

)

Other income

 

 

179

 

 

 

46

 

 

395

 

167

 

Total noninterest income

 

 

1,578

 

 

 

1,106

 

 

3,216

 

2,364

 

Noninterest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

 

1,021

 

 

 

876

 

 

2,054

 

1,744

 

Occupancy and equipment

 

 

435

 

 

 

349

 

 

826

 

750

 

Telecommunications and outsourced information services

 

 

145

 

 

 

100

 

 

279

 

203

 

Depositor and other retail banking losses

 

 

51

 

 

 

49

 

 

108

 

104

 

Advertising and promotion

 

 

117

 

 

 

74

 

 

211

 

128

 

Professional fees

 

 

45

 

 

 

38

 

 

81

 

71

 

Other expense

 

 

415

 

 

 

281

 

 

808

 

548

 

Total noninterest expense

 

 

2,229

 

 

 

1,767

 

 

4,367

 

3,548

 

Minority interest expense

 

 

37

 

 

 

 

 

37

 

 

Income from continuing operations before income taxes

 

 

1,148

 

 

 

1,317

 

 

2,682

 

2,741

 

Income taxes

 

 

389

 

 

 

484

 

 

947

 

1,019

 

Income from continuing operations, net of taxes

 

 

759

 

 

 

833

 

 

1,735

 

1,722

 

Discontinued Operations

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from discontinued operations before income taxes

 

 

12

 

 

 

17

 

 

27

 

35

 

Income taxes

 

 

4

 

 

 

6

 

 

10

 

12

 

Income from discontinued operations, net of taxes

 

 

8

 

 

 

11

 

 

17

 

23

 

Net Income

 

 

$

767

 

 

 

$

844

 

 

$

1,752

 

$

1,745

 

Basic Earnings Per Common Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

$

0.80

 

 

 

$

0.97

 

 

$

1.81

 

$

1.99

 

Income from discontinued operations

 

 

0.01

 

 

 

0.01

 

 

0.02

 

0.03

 

Net income

 

 

0.81

 

 

 

0.98

 

 

1.83

 

2.02

 

Diluted Earnings Per Common Share:

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

 

0.78

 

 

 

0.94

 

 

1.75

 

1.94

 

Income from discontinued operations

 

 

0.01

 

 

 

0.01

 

 

0.02

 

0.03

 

Net income

 

 

0.79

 

 

 

0.95

 

 

1.77

 

1.97

 

Dividends declared per common share

 

 

0.51

 

 

 

0.47

 

 

1.01

 

0.93

 

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

 

 

947,023

 

 

 

865,221

 

 

960,245

 

865,078

 

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

 

 

975,504

 

 

 

887,250

 

 

989,408

 

888,020

 

 

See Notes to Consolidated Financial Statements.

1




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

 

 

June 30,
2006

 

(Restated)
December 31,
2005

 

 

 

(dollars in millions)

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

6,675

 

 

$

6,214

 

 

Federal funds sold and securities purchased under agreements to resell

 

4,112

 

 

2,137

 

 

Trading assets (including securities pledged of $2,405 and $3,281)

 

7,445

 

 

10,999

 

 

Available-for-sale securities, total amortized cost of $28,504 and $24,810:

 

 

 

 

 

 

 

Mortgage-backed securities (including securities pledged of $5,656 and $3,950)

 

21,438

 

 

20,648

 

 

Investment securities (including securities pledged of $4,446 and $2,773)

 

6,358

 

 

4,011

 

 

Total available-for-sale securities

 

27,796

 

 

24,659

 

 

Loans held for sale

 

23,342

 

 

33,582

 

 

Loans held in portfolio

 

243,503

 

 

229,632

 

 

Allowance for loan and lease losses

 

(1,663

)

 

(1,695

)

 

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

 

241,840

 

 

227,937

 

 

Investment in Federal Home Loan Banks

 

3,500

 

 

4,257

 

 

Mortgage servicing rights

 

9,162

 

 

8,041

 

 

Goodwill

 

8,339

 

 

8,298

 

 

Other assets

 

18,673

 

 

17,449

 

 

Total assets

 

$

350,884

 

 

$

343,573

 

 

Liabilities

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

$

35,457

 

 

$

34,014

 

 

Interest-bearing deposits

 

169,101

 

 

159,153

 

 

Total deposits

 

204,558

 

 

193,167

 

 

Federal funds purchased and commercial paper

 

6,138

 

 

7,081

 

 

Securities sold under agreements to repurchase

 

19,866

 

 

15,532

 

 

Advances from Federal Home Loan Banks

 

55,311

 

 

68,771

 

 

Other borrowings

 

27,995

 

 

23,777

 

 

Other liabilities

 

8,926

 

 

7,951

 

 

Minority interests

 

1,959

 

 

15

 

 

Total liabilities

 

324,753

 

 

316,294

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

Common stock, no par value: 1,600,000,000 shares authorized, 962,880,117 and 993,913,800 shares issued and outstanding

 

 

 

 

 

Capital surplus – common stock

 

6,596

 

 

8,176

 

 

Accumulated other comprehensive loss

 

(599

)

 

(235

)

 

Retained earnings

 

20,134

 

 

19,338

 

 

Total stockholders’ equity

 

26,131

 

 

27,279

 

 

Total liabilities and stockholders’ equity

 

$

350,884

 

 

$

343,573

 

 

 

See Notes to Consolidated Financial Statements.

2




WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME
(UNAUDITED)

 

 

Number
of
Shares

 

Capital
Surplus–Common
Stock

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Retained
Earnings

 

Total

 

 

 

(in millions)

 

BALANCE, December 31, 2004 (previously reported)

 

 

874.3

 

 

$

3,350

 

 

$

(76

)

 

$

17,952

 

$

21,226

 

Restatement of retained earnings for tax adjustments affecting 2001 and prior periods (see Note 2)

 

 

 

 

 

 

 

 

(337

)

(337

)

BALANCE, December 31, 2004 (as restated)

 

 

874.3

 

 

3,350

 

 

(76

)

 

17,615

 

20,889

 

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 (restated)

 

 

878.4

 

 

$

3,449

 

 

$

14

 

 

$

18,550

 

$

22,013

 

BALANCE, December 31, 2005 (previously reported)

 

 

993.9

 

 

$

8,176

 

 

$

(235

)

 

$

19,675

 

$

27,616

 

Restatement of retained earnings for tax adjustments affecting 2001 and prior periods (see Note 2)

 

 

 

 

 

 

 

 

(337

)

(337

)

BALANCE, December 31, 2005 (as restated)

 

 

993.9

 

 

8,176

 

 

(235

)

 

19,338

 

27,279

 

Cumulative effect from the adoption of Statement No. 156, net of income taxes

 

 

 

 

 

 

6

 

 

29

 

35

 

Adjusted balance

 

 

993.9

 

 

8,176

 

 

(229

)

 

19,367

 

27,314

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

1,752

 

1,752

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

(371

)

 

 

(371

)

Net unrealized gain from cash flow hedging instruments

 

 

 

 

 

 

2

 

 

 

2

 

Minimum pension liability adjustments

 

 

 

 

 

 

(1

)

 

 

(1

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

1,382

 

Cash dividends declared on common stock

 

 

 

 

 

 

 

 

(985

)

(985

)

Common stock repurchased and retired

 

 

(47.0

)

 

(2,108

)

 

 

 

 

(2,108

)

Common stock issued

 

 

16.0

 

 

528

 

 

 

 

 

528

 

BALANCE, June 30, 2006

 

 

962.9

 

 

$

6,596

 

 

$

(599

)

 

$

20,134

 

$

26,131

 

 

See Notes to Consolidated Financial Statements.

3




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

 

 

Six Months Ended
June 30,

 

 

 

2006

 

(Restated)
2005

 

 

 

(in millions)

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$

1,752

 

$

1,745

 

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

 

 

 

 

 

Provision for loan and lease losses

 

306

 

47

 

Gain from mortgage loans

 

(335

)

(426

)

Loss from sales of available-for-sale securities

 

1

 

92

 

Depreciation and amortization

 

445

 

1,355

 

Provision for mortgage servicing rights reversal

 

 

(177

)

Stock dividends from Federal Home Loan Banks

 

(86

)

(65

)

Capitalized interest income from option adjustable-rate mortgages

 

(428

)

(72

)

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

 

(60,728

)

(82,317

)

Proceeds from sales of loans held for sale

 

68,121

 

72,838

 

Excess tax benefits from stock-based payment arrangement

 

(12

)

 

Net decrease in trading assets

 

4,843

 

70

 

Increase in other assets

 

(1,603

)

(365

)

Increase in other liabilities

 

835

 

746

 

Net cash provided (used) by operating activities

 

13,111

 

(6,529

)

Cash Flows from Investing Activities

 

 

 

 

 

Purchases of available-for-sale securities

 

(9,990

)

(8,282

)

Proceeds from sales and maturities of mortgage-backed securities

 

4,561

 

3,118

 

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

 

150

 

3,339

 

Principal payments on available-for-sale securities

 

1,500

 

1,626

 

Purchases of Federal Home Loan Bank stock

 

 

(163

)

Redemption of Federal Home Loan Bank stock

 

840

 

93

 

Origination and purchases of loans held in portfolio

 

(49,801

)

(46,900

)

Principal payments on loans held in portfolio

 

34,923

 

40,596

 

Proceeds from sales of loans held in portfolio

 

1,954

 

173

 

Proceeds from sales of foreclosed assets

 

237

 

214

 

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

 

(1,975

)

(543

)

Purchases of premises and equipment, net

 

(183

)

(242

)

Net cash used by investing activities

 

(17,784

)

(6,971

)

 

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

See Notes to Consolidated Financial Statements.

4




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

(Continued from the previous page.)

 

 

Six Months Ended
June 30,

 

 

 

2006

 

(Restated)
2005

 

 

 

(in millions)

 

Cash Flows from Financing Activities

 

 

 

 

 

Increase in deposits

 

$

11,391

 

$

10,659

 

Increase (decrease) in short-term borrowings

 

3,838

 

(901

)

Proceeds from long-term borrowings

 

15,003

 

5,646

 

Repayments of long-term borrowings

 

(10,803

)

(2,456

)

Proceeds from advances from Federal Home Loan Banks

 

14,909

 

45,684

 

Repayments of advances from Federal Home Loan Banks

 

(28,368

)

(44,222

)

Proceeds from issuance of preferred securities

 

1,959

 

 

Excess tax benefits from stock-based payment arrangement

 

12

 

 

Cash dividends paid on common stock

 

(985

)

(810

)

Repurchase of common stock

 

(2,108

)

(100

)

Other

 

286

 

159

 

Net cash provided by financing activities

 

5,134

 

13,659

 

Increase in cash and cash equivalents

 

461

 

159

 

Cash and cash equivalents, beginning of period

 

6,214

 

4,455

 

Cash and cash equivalents, end of period

 

$

6,675

 

$

4,614

 

Noncash Activities

 

 

 

 

 

Loans exchanged for mortgage-backed securities

 

$

909

 

$

668

 

Real estate acquired through foreclosure

 

293

 

210

 

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

 

1,174

 

(222

)

Mortgage-backed securities transferred from available-for-sale to trading

 

858

 

 

Cash Paid During the Period For

 

 

 

 

 

Interest on deposits

 

$

2,493

 

$

1,439

 

Interest on borrowings

 

2,655

 

1,519

 

Income taxes

 

557

 

1,109

 

 

See Notes to Consolidated Financial Statements.

5




WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Summary of Significant 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”). The Company’s financial reporting and accounting policies conform to accounting principles generally accepted in the United States of America (“GAAP”). All intercompany transactions and balances have been eliminated. Certain amounts in prior periods have been reclassified to conform to the current period’s presentation. In particular, prepayment fees were reclassified from noninterest income to interest income and expenses related to low income housing partnerships were reclassified from noninterest expense to other income.

The reclassification of prepayment fees was made in conjunction with changes made to regulatory financial reporting standards by the Office of Thrift Supervision. The amount reclassified to interest income totaled $83 million and $155 million for the three and six months ended June 30, 2005. Prepayment fees totaled $67 million and $131 million for the three and six months ended June 30, 2006.

In the second quarter of 2006, the Company reclassified expenses related to its investments in low income housing partnerships. The amount reclassified to other income totaled $13 million and $25 million for the three and six months ended June 30, 2005 and $20 million for the three months ended March 31, 2006. Such expenses totaled $44 million for the six months ended June 30, 2006.

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 2005 Annual Report on Form 10-K/A.

Recently Issued Accounting Standards Not Yet Adopted

In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“Statement”) No. 155, Accounting for Certain Hybrid Financial Instruments . This Statement amends Statements No. 133, Accounting for Derivative Instruments and Hedging Activities and No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities to simplify and achieve more consistency in the accounting for certain financial instruments. This Statement permits fair value remeasurement for any hybrid financial instrument with an embedded derivative that otherwise would require bifurcation, provided the entire instrument is accounted for on a fair value basis and establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. Statement No. 155 is effective for all of the Company’s financial instruments acquired or issued after December 31, 2006. The Company is currently evaluating the impact this guidance will have on the Consolidated Statements of Income and the Consolidated Statements of Financial Condition.

In June 2006, the FASB issued Interpretation 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes , an interpretation of FASB Statement No. 109, Accounting for Income Taxes. This Interpretation requires that a tax position be recognized only if it is “more likely than not” to be sustained, based solely on its technical merits, as of the reporting date. A tax position that meets the more-likely-than-not criterion shall be measured at the largest amount of benefit that is more than 50 percent likely of being realized upon ultimate settlement. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the impact this guidance will have on the Consolidated Statements of Income and the Consolidated Statements of Financial Condition.

6




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

In June 2006, the Emerging Issues Task Force (“EITF”) reached consensus on the guidance provided by EITF 05-1, Accounting for the Conversion of an Instrument that Becomes Convertible Upon the Issuer’s Exercise of a Call Option . The issuance of equity securities to settle an instrument (pursuant to the instrument’s original conversion terms) that becomes convertible upon the issuer’s exercise of a call option should be accounted for as a conversion if the debt instrument contained a substantive conversion feature as of its issuance date (i.e., no gain or loss should be recognized related to the equity securities issued to settle the instrument). Additionally, the issuance of equity securities to settle an instrument that, as of its issuance date, does not contain a substantive conversion feature should be accounted for as a debt extinguishment and the fair value of the equity securities issued should be considered a component of the reacquisition price of the debt. The EITF also reached a consensus that Issue No. 03-7, Accounting for the Settlement of the Equity-Settled Portion of a Convertible Debt Instrument That Permits or Requires the Conversion Spread to Be Settled in Stock (Instrument C of Issue No. 90-19) , should be amended to clarify that Issue 03-7 does not apply to settlements within the scope of Issue 05-1. The guidance is effective for all conversions within its scope that result from the exercise of call options in interim or annual reporting periods beginning after June 28, 2006, and is not expected to have a significant effect on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition.

Note 2: Restatement of Financial Statements

After announcing its earnings for the second quarter ended June 30, 2006, the Company completed a comprehensive review and reconciliation of its current and deferred income tax accounts and concluded that a $337 million reduction to retained earnings was necessary, representing cumulative adjustments to net income recorded in prior periods up to and including 2001. No adjustments were made to net income or earnings per share for any of the periods from 2002 through June 30, 2006. The adjustments reflect corrections to the tax accounting records related to matters occurring prior to 2002 at the Company and predecessor companies, including H.F. Ahmanson & Co., Great Western Financial Corp. and American Savings Bank, which the Company acquired in the late 1990s. The adjustments arose primarily from inadequate tax records, delays in reconciling tax accounts and errors in recording the impact of certain tax payments and the income tax expense of the Company during those years. Accordingly, these adjustments affected the balance of retained earnings and certain tax accounts at December 31, 2001 and each period thereafter. Refer to Note 2 to the Consolidated Financial Statements – “Restatement of Financial Statements” in the Company’s 2005 Annual Report on Form 10-K/A for further information regarding the effects of this restatement on the Company’s Consolidated Statements of Financial Condition at December 31, 2005.

Note 3: Discontinued Operations

In July 2006 the Company announced its exit from the mutual fund management business and subsequently entered into a definitive agreement to sell its subsidiary, WM Advisors, Inc. WM Advisors provides investment management, distribution and shareholder services to the WM Group of Funds. Accordingly, the results of its operations have been removed from the Company’s results of continuing operations for all periods presented on the Consolidated Statements of Income and Note 8 to the Consolidated Financial Statements – “Operating Segments,” and are presented in aggregate as discontinued operations. Assets and liabilities of WM Advisors have been reclassified to other assets and other liabilities on the Consolidated Statements of Financial Condition. The sale is expected to close in the fourth quarter of 2006.

7




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

Results of operations for WM Advisors were as follows:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

     2006     

 

    2005    

 

   2006   

 

   2005   

 

 

 

(in millions)

 

Net interest income

 

 

$

 

 

 

$

 

 

 

$

1

 

 

 

$

 

 

Noninterest income

 

 

69

 

 

 

66

 

 

 

136

 

 

 

129

 

 

Noninterest expense

 

 

57

 

 

 

49

 

 

 

110

 

 

 

94

 

 

Income taxes

 

 

4

 

 

 

6

 

 

 

10

 

 

 

12

 

 

Net income

 

 

$

8

 

 

 

$

11

 

 

 

$

17

 

 

 

$

23

 

 

 

Note 4: Earnings Per Share

Information used to calculate earnings per share was as follows:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

(in thousands)

 

Weighted average shares:

 

 

 

 

 

 

 

 

 

Basic weighted average number of common shares outstanding

 

947,023

 

865,221

 

960,245

 

865,078

 

Dilutive effect of potential common shares from:

 

 

 

 

 

 

 

 

 

Awards granted under equity incentive programs

 

15,275

 

12,665

 

16,009

 

13,468

 

Common stock warrants

 

11,071

 

9,364

 

10,754

 

9,474

 

Convertible debt (1)

 

1,179

 

 

1,922

 

 

Accelerated share repurchase program

 

956

 

 

478

 

 

Diluted weighted average number of common shares outstanding

 

975,504

 

887,250

 

989,408

 

888,020

 


(1)                  Acquired on October 1, 2005 through the merger with Providian Financial Corporation.

For the three months and six months ended June 30, 2006, options to purchase approximately 15.4 million and 15.6 million 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, 2005, options to purchase approximately 8.8 million and 8.7 million 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.

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 to certain of the former investors in Keystone Holdings and their transferees are related to the outcome of certain litigation and not based on future earnings or market prices. At June 30, 2006, the conditions for releasing the shares from escrow did not exist, and therefore, none of the shares in the escrow were included in the above computations.

8




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

Note 5: Mortgage Banking Activities

In March 2006, the FASB issued Statement No. 156, Accounting for Servicing of Financial Assets , which amends Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities . For each class of separately recognized servicing asset, this Statement permits an entity to choose either to amortize such assets in proportion to and over the period of estimated net servicing income and perform an impairment assessment at each reporting date, or to report servicing assets at fair value at each reporting date and record changes in fair value in earnings in the period in which the changes occur. At its initial adoption, the Statement permits a one-time reclassification of available-for-sale securities to trading securities, provided that the securities are identified as offsetting the entity’s exposure to changes in fair value of servicing assets that are reported at fair value.

As permitted by the early adoption provisions of this accounting standard, the Company applied Statement No. 156 to its financial statements on January 1, 2006 and elected to measure all classes of mortgage servicing assets at fair value. The Company also elected to transfer its January 1, 2006 portfolio of available-for-sale mortgage servicing rights (“MSR”) risk management securities to trading. The effects of these changes were recorded as a cumulative effect of a change in accounting principle adjustments to retained earnings as of January 1, 2006 and were comprised of a $35 million adjustment, net of taxes, from the MSR fair value election and a $(6) million adjustment, net of taxes, from the transfer of available-for-sale securities, designated as MSR risk management instruments, to the trading portfolio. Upon electing the fair value method of accounting for its mortgage servicing assets, the Company discontinued the application of fair value hedge accounting. Accordingly, beginning in 2006, all derivatives held for MSR risk management are treated as economic hedges, with valuation changes recorded as revaluation gain (loss) from derivatives economically hedging MSR. Additionally, upon the change from the lower of cost or fair value accounting method to fair value accounting under Statement No. 156, the calculation of amortization and the assessment of impairment were discontinued and the MSR valuation allowance was written off against the recorded value of the MSR. Those measurements have been replaced by fair value adjustments that encompass market-driven valuation changes and the runoff in value that occurs from the passage of time, which are each separately reported.

9




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

Revenue from sales and servicing of home mortgage loans, including the effects of derivative risk management instruments, consisted of the following:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

     2006    

 

    2005    

 

2006

 

2005

 

 

 

(in millions)

 

Revenue from sales and servicing of home mortgage loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain from home mortgage loans and originated mortgage-backed securities

 

 

$

184

 

 

 

$

250

 

 

$

341

 

$

431

 

Revaluation gain (loss) from derivatives economically hedging loans held for sale

 

 

67

 

 

 

(79

)

 

119

 

1

 

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

 

 

251

 

 

 

171

 

 

460

 

432

 

Servicing activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Home mortgage loan servicing revenue (1)

 

 

586

 

 

 

523

 

 

1,159

 

1,032

 

Change in MSR fair value due to valuation inputs or assumptions

 

 

435

 

 

 

 

 

849

 

 

Change in MSR fair value due to payments on loans and other

 

 

(460

)

 

 

 

 

(869

)

 

MSR valuation adjustments (2)

 

 

 

 

 

(77

)

 

 

462

 

Amortization of MSR

 

 

 

 

 

(564

)

 

 

(1,133

)

Revaluation gain (loss) from derivatives economically hedging MSR

 

 

(433

)

 

 

61

 

 

(956

)

96

 

Adjustment to MSR fair value pursuant to MSR sale (3)

 

 

(157

)

 

 

 

 

(157

)

 

Home mortgage loan servicing revenue (expense), net of MSR valuation changes and derivative risk management instruments

 

 

(29

)

 

 

(57

)

 

26

 

457

 

Total revenue from sales and servicing of home mortgage loans

 

 

$

222

 

 

 

$

114

 

 

$

486

 

$

889

 


(1)    Includes late charges 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 fair value accounting methodology in 2005.

(3)    Sale consists of approximately $2.6 billion of mortgage servicing rights.

10




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

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

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2006

 

2005

 

2006

 

2005

 

 

 

(in millions)

 

Balance, beginning of period

 

$

569,501

 

$

542,797

 

$

563,208

 

$

540,392

 

Home loans:

 

 

 

 

 

 

 

 

 

Additions

 

30,949

 

36,174

 

65,974

 

70,706

 

Loan payments and other

 

(30,377

)

(35,689

)

(59,440

)

(68,550

)

Net change in commercial real estate loans

 

279

 

42

 

610

 

776

 

Balance, end of period

 

$

570,352

(1)

$

543,324

 

$

570,352

(1)

$

543,324

 


(1)    Does not include the effects of MSR sale, which reduced the unpaid principal balance of the servicing portfolio by $141 billion in July 2006.

Changes in the balance of MSR were as follows:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

    2006    

 

    2005    

 

2006

 

2005

 

 

 

(in millions)

 

Balance, beginning of period (1)

 

 

$

8,736

 

 

 

$

6,802

 

 

$

8,041

 

$

5,906

 

Home loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions

 

 

607

 

 

 

555

 

 

1,239

 

1,044

 

Changes in MSR fair value due to valuation inputs or assumptions

 

 

435

 

 

 

 

 

849

 

 

Payments on loans and other

 

 

(460

)

 

 

 

 

(869

)

 

Adjustment to MSR fair value pursuant to MSR sale

 

 

(157

)

 

 

 

 

(157

)

 

Fair value basis adjustment (2)

 

 

 

 

 

 

 

57

 

 

Amortization

 

 

 

 

 

(564

)

 

 

(1,133

)

(Impairment) reversal

 

 

 

 

 

(250

)

 

 

177

 

Statement No. 133 MSR accounting valuation adjustments

 

 

 

 

 

(813

)

 

 

(268

)

Net change in commercial real estate MSR

 

 

1

 

 

 

 

 

2

 

4

 

Balance, end of period (1)

 

 

$

9,162

 

 

 

$

5,730

(3)

 

$

9,162

 

$

5,730

(3)


(1)           Net of valuation allowance for all periods in 2005.

(2)           Pursuant to the adoption of Statement No. 156 on January 1, 2006, the $57 million difference between the net carrying value and fair value was recorded as an increase to the basis of the Company’s MSR.

(3)           At June 30, 2005, aggregate MSR fair value was $5.74 billion.

11




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

Changes in the valuation allowance for MSR were as follows:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2005

 

2006

 

2005

 

 

 

(in millions)

 

Balance, beginning of period

 

 

$

1,513

 

 

$

914

 

$

1,981

 

Impairment (reversal)

 

 

250

 

 

 

(177

)

Other-than-temporary impairment

 

 

(11

)

 

 

(45

)

Other

 

 

(6

)

 

(914

) (1)

(13

)

Balance, end of period

 

 

$

1,746

 

 

$

 

$

1,746

 


(1)           Pursuant to the adoption of Statement No. 156, the valuation allowance was written off against the recorded value of the MSR.

Note 6: Guarantees

In the ordinary course of business, the Company sells loans to third parties but retains credit risk exposure on those loans. When loans are sold with retained credit risk provisions attached to the sale, the Company commits to stand ready to perform, if the loan defaults, by making payments to remedy the default or repurchasing the loan. The Company also sells loans without retained credit risk that it may be required to repurchase for violation of a representation or warranty made in connection with the sale of the loan that has a material adverse effect on the value of the loan, or if the Company agreed to repurchase the loan in the event of a first payment or early payment default. When a loan sold to an investor without retained credit risk fails to perform according to its contractual terms, the investor will typically review the loan file to search for errors that may have been made in the process of originating the loan. If errors are discovered and it is determined that such errors constitute a violation of a representation or warranty made to the investor in connection with the loan’s sale, then the Company will be required to either repurchase the loan or indemnify the investor for losses sustained if the violation had a material adverse effect on the value of the loan. As of June 30, 2006 and December 31, 2005, the amount of loans sold without retained credit risk totaled $561.37 billion and $555.51 billion, which substantially represents the unpaid principal balance of the Company’s loans serviced for others portfolio. The Company has recorded loss contingency reserves of $107 million as of June 30, 2006 and $130 million as of December 31, 2005 to cover the estimated loss exposure related to loan origination process errors that are inherent within this portfolio.

In 2004 and 2005, the Company’s Long Beach Mortgage division engaged in whole loan sale transactions of originated subprime loans in which it agreed to repurchase from the investor each “early payment default” loan at a price equal to the loan’s face value plus the amount of any premium paid by the investor. An early payment default occurs when the borrower fails to make the first post-sale payment due on the loan by a contractually specified date. Usually when such an event occurs, the fair value of the loan at the time of its repurchase is lower than the face value. In the fourth quarter of 2005, the Company experienced increased incidents of repurchases of early payment default loans sold by Long Beach Mortgage. The Company has recorded loss contingency reserves of $3 million as of June 30, 2006 and $40 million as of December 31, 2005 to cover estimated loss exposure related to such loan sales.

Note 7: Stock-Based Compensation

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. Effective January 1, 2006, the Company adopted Statement No. 123R, Share-Based

12




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

Payment , using the modified prospective application transition method. As the Company had already adopted Statement No. 148 and substantially all stock-based awards granted prior to its adoption are fully vested at December 31, 2005, Statement No. 123R did not have a significant effect on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition. Prior to the Company’s adoption of Statement No. 123R, benefits of tax deductions in excess of recognized compensation costs were reported as operating cash flows in the Consolidated Statements of Cash Flows. Statement No. 123R requires excess tax benefits to be reported as a financing cash inflow rather than as a reduction of taxes paid.

Statement No. 123R requires an entity that previously had a policy of recognizing the effect of forfeitures as they occurred to estimate the number of outstanding instruments for which the requisite service is not expected to be rendered. The effect of this change in accounting principle amounted to $25 million and has been reflected as a decrease to compensation and benefits expense in the three months ended March 31, 2006.

Net income for the three and six months ended June 30, 2006 included $57 million and $114 million of compensation costs and $22 million and $43 million of income tax benefits related to the Company’s stock-based compensation arrangements. Net income for the three and six months ended June 30, 2005 included $30 million and $66 million of compensation costs and $12 million and $25 million of income tax benefits related to the Company’s stock-based compensation arrangements. As the Company elected to use the modified prospective application method, results for the three and six months ended June 30, 2005 do not reflect any restated amounts.

Washington Mutual maintains an equity incentive plan and an employee stock purchase plan. For further discussion of the Company’s equity incentive plan and employee stock purchase plan, refer to Note 20 to the Consolidated Financial Statements – “Stock-Based Compensation Plan and Shareholder Rights Plan” of Washington Mutual, Inc.’s 2005 Annual Report on Form 10-K/A.

13




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

The following table presents the status of all stock option plans at June 30, 2006 during the six months then ended:

 

 

 

 



Weighted   

 

Weighted
Average
Remaining

 

 

 

 

 

 

 

Average

 

Contractual

 

Aggregate

 

 

 

 

 

Exercise

 

Term

 

  Intrinsic Value  

 

 

 

Number

 

Price

 

(in years)

 

(in millions)

 

1994 Stock Option Plan:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2005

 

 

19,590,567

 

 

 

$

31.40

 

 

 

5.15

 

 

 

$

237

 

 

Granted

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

(4,167,782

)

 

 

31.40

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(3,341

)

 

 

35.56

 

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2006

 

 

15,419,444

 

 

 

31.40

 

 

 

4.79

 

 

 

219

 

 

Outstanding options exercisable
as of June 30, 2006

 

 

15,419,444

 

 

 

31.40

 

 

 

4.79

 

 

 

219

 

 

WAMU Shares Stock Option Plan:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2005

 

 

4,869,410

 

 

 

$

36.59

 

 

 

4.22

 

 

 

$

34

 

 

Granted

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

(1,541,083

)

 

 

35.93

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(175,398

)

 

 

35.13

 

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2006

 

 

3,152,929

 

 

 

37.00

 

 

 

4.32

 

 

 

27

 

 

Outstanding options exercisable
as of June 30, 2006

 

 

3,152,929

 

 

 

37.00

 

 

 

4.32

 

 

 

27

 

 

Acquired Plans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2005

 

 

8,217,386

 

 

 

$

51.98

 

 

 

4.74

 

 

 

$

104

 

 

Granted

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

(1,846,679

)

 

 

20.03

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(317,565

)

 

 

94.25

 

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2006

 

 

6,053,142

 

 

 

59.52

 

 

 

4.19

 

 

 

68

 

 

Outstanding options exercisable
as of June 30, 2006

 

 

6,053,142

 

 

 

59.52

 

 

 

4.19

 

 

 

68

 

 

2003 Equity Incentive Plan:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Outstanding at December 31, 2005

 

 

17,271,539

 

 

 

$

40.91

 

 

 

8.38

 

 

 

$

45

 

 

Granted

 

 

7,068,407

 

 

 

43.35

 

 

 

 

 

 

 

 

 

 

Exercised

 

 

(1,124,989

)

 

 

40.36

 

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(1,273,375

)

 

 

42.06

 

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2006

 

 

21,941,582

 

 

 

41.66

 

 

 

8.26

 

 

 

86

 

 

Outstanding options exercisable
as of June 30, 2006

 

 

8,112,316

 

 

 

40.60

 

 

 

7.16

 

 

 

40

 

 

 

The fair value of the options granted under the Company’s stock options plans is estimated on the date of the grant using a binomial model that used the assumptions noted in the following table. Expected volatilities are based on implied volatilities from traded options on the Company’s stock, the historical volatility of the Company’s stock and other factors. Employees that have similar historical exercise

14




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

behavior are grouped together for valuation purposes. The expected term of options granted is derived from historical exercise behavior combined with possible option lives based on remaining contractual terms of unexercised and outstanding options. The range given below results from certain groups of employees exhibiting different behavior. The risk-free rate for periods within the contractual life of the option is based on the rate available on zero-coupon government issues in effect at the time of the grant.

 

 

Six Months Ended June 30,

 

 

 

              2006              

 

              2005              

 

Weighted average grant-date fair value:

 

 

 

 

 

 

 

 

 

2003 Equity Incentive Plan

 

 

$

8.06

 

 

 

$

8.39

 

 

Dividend yield

 

 

4.70

%

 

 

4.20 - 4.28

%

 

Expected volatility

 

 

21.90 - 25.50

 

 

 

25.99 - 30.74

 

 

Risk free interest rate

 

 

4.22 - 5.02

 

 

 

3.55 - 4.15

 

 

Expected life (in years)

 

 

5.1 - 6.2 years

 

 

 

4.5 - 7 years

 

 

 

The total intrinsic value of options exercised under the plans during the three and six months ended June 30, 2006 was $55 million and $117 million. The total intrinsic value of options exercised under the plans during the three and six months ended June 30, 2005 was $13 million and $45 million. As of June 30, 2006, there was $94 million of total unrecognized compensation costs related to stock options. These costs are expected to be recognized over a weighted average period of 1.9 years.

Cash received from stock options exercised for the three and six months ended June 30, 2006 was $137 million and $269 million. The income tax benefits from stock options exercised total $18 million and $41 million for the same periods.

Equity Incentive Plan

The 2003 Equity Incentive Plan (“2003 EIP”) and two of its predecessor plans (the Equity Incentive Plan and the Restricted Stock Plan) permit grants of restricted stock, with or without performance-based vesting restrictions, for the benefit of all employees, officers, directors, consultants and advisors of the Company. The Company measures the fair value of the 2003 EIP restricted stock awards based upon the market price of the underlying common stock as of the date of grant. The 2003 EIP restricted stock awards are amortized over their applicable vesting period (generally three years) using the straight-line method.

The following table presents the status and changes in restricted stock awards issued under all plans:

 

 

         Shares         

 

Weighted
Average Grant-
   Date Fair Value   

 

Restricted stock awards:

 

 

 

 

 

 

 

 

 

Nonvested balance at December 31, 2005

 

 

6,388,821

 

 

 

$

40.80

 

 

Granted

 

 

3,852,564

 

 

 

43.35

 

 

Vested

 

 

(1,633,841

)

 

 

41.53

 

 

Forfeited

 

 

(806,307

)

 

 

41.38

 

 

Nonvested balance at June 30, 2006