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 MARCH 31, 2007

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)

1301 Second 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 April 30, 2007:

Common Stock – 888,408,367 (1)

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

 




WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2007
TABLE OF CONTENTS

 

Page

 

PART I – Financial Information

 

 

1

 

 

Item 1.    Financial Statements

 

 

1

 

 

Consolidated Statements of Income – 
Three Months Ended March 31, 2007 and 2006

 

 

1

 

 

Consolidated Statements of Financial Condition – 
March 31, 2007 and December 31, 2006

 

 

2

 

 

Consolidated Statements of Stockholders’ Equity and Comprehensive Income – 
Three Months Ended March 31, 2007 and 2006

 

 

3

 

 

Consolidated Statements of Cash Flows – 
Three Months Ended March 31, 2007 and 2006

 

 

4

 

 

Notes to Consolidated Financial Statements

 

 

6

 

 

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

 

 

22

 

 

Cautionary Statements

 

 

22

 

 

Controls and Procedures

 

 

23

 

 

Overview

 

 

23

 

 

Critical Accounting Estimates

 

 

24

 

 

Recently Issued Accounting Standards Not Yet Adopted

 

 

25

 

 

Summary Financial Data

 

 

26

 

 

Earnings Performance from Continuing Operations

 

 

27

 

 

Review of Financial Condition

 

 

33

 

 

Operating Segments

 

 

36

 

 

Off-Balance Sheet Activities

 

 

41

 

 

Capital Adequacy

 

 

42

 

 

Risk Management

 

 

42

 

 

Credit Risk Management

 

 

43

 

 

Liquidity Risk and Capital Management

 

 

47

 

 

Market Risk Management

 

 

50

 

 

Operational Risk Management

 

 

54

 

 

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

 

 

50

 

 

Item 4.    Controls and Procedures

 

 

23

 

 

PART II – Other Information

 

 

55

 

 

Item 1.    Legal Proceedings

 

 

55

 

 

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

 

 

56

 

 

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

 

 

56

 

 

Item 6.    Exhibits

 

 

56

 

 

 

i




Part I – FINANCIAL INFORMATION
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)

 

Three Months Ended
March 31,

 

 

2007

 

2006

 

 

 

(in millions, except
per share amounts)

 

Interest Income

 

 

 

 

 

Loans held for sale

 

$

562

 

$

462

 

Loans held in portfolio

 

3,900

 

3,580

 

Available-for-sale securities

 

332

 

322

 

Trading assets

 

113

 

198

 

Other interest and dividend income

 

101

 

95

 

Total interest income

 

5,008

 

4,657

 

Interest Expense

 

 

 

 

 

Deposits

 

1,772

 

1,221

 

Borrowings

 

1,155

 

1,319

 

Total interest expense

 

2,927

 

2,540

 

Net interest income

 

2,081

 

2,117

 

Provision for loan and lease losses

 

234

 

82

 

Net interest income after provision for loan and lease losses

 

1,847

 

2,035

 

Noninterest Income

 

 

 

 

 

Revenue from sales and servicing of home mortgage loans

 

125

 

263

 

Revenue from sales and servicing of consumer loans

 

443

 

376

 

Depositor and other retail banking fees

 

665

 

578

 

Credit card fees

 

172

 

138

 

Securities fees and commissions

 

60

 

52

 

Insurance income

 

29

 

33

 

Net losses on trading assets

 

(108

)

(13

)

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

 

35

 

(7

)

Other income

 

120

 

218

 

Total noninterest income

 

1,541

 

1,638

 

Noninterest Expense

 

 

 

 

 

Compensation and benefits

 

1,002

 

1,032

 

Occupancy and equipment

 

376

 

391

 

Telecommunications and outsourced information services

 

129

 

134

 

Depositor and other retail banking losses

 

61

 

56

 

Advertising and promotion

 

98

 

95

 

Professional fees

 

38

 

36

 

Other expense

 

401

 

394

 

Total noninterest expense

 

2,105

 

2,138

 

Minority interest expense

 

43

 

 

Income from continuing operations before income taxes

 

1,240

 

1,535

 

Income taxes

 

456

 

559

 

Income from continuing operations

 

784

 

976

 

Discontinued Operations

 

 

 

 

 

Income from discontinued operations before income taxes

 

 

15

 

Income taxes

 

 

6

 

Income from discontinued operations

 

 

9

 

Net Income

 

$

784

 

$

985

 

Net Income Available to Common Stockholders

 

$

777

 

$

985

 

Basic Earnings Per Common Share:

 

 

 

 

 

Income from continuing operations

 

$

0.89

 

$

1.00

 

Income from discontinued operations

 

 

0.01

 

Net income

 

0.89

 

1.01

 

Diluted Earnings Per Common Share:

 

 

 

 

 

Income from continuing operations

 

$

0.86

 

$

0.97

 

Income from discontinued operations

 

 

0.01

 

Net income

 

0.86

 

0.98

 

Dividends declared per common share

 

0.54

 

0.50

 

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

 

874,816

 

973,614

 

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

 

899,706

 

1,003,460

 

 

See Notes to Consolidated Financial Statements.

1




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

 

March 31,
2007

 

December 31,
2006

 

 

 

(dollars in millions)

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,047

 

 

$

6,948

 

 

Federal funds sold and securities purchased under agreements to resell

 

8,279

 

 

3,743

 

 

Trading assets (including securities pledged of $3,012 and $1,868)

 

5,290

 

 

4,434

 

 

Available-for-sale securities, total amortized cost of $22,921 and $25,073:

 

 

 

 

 

 

 

Mortgage-backed securities (including securities pledged of $1,334 and $3,864)         

 

15,939

 

 

18,063

 

 

Investment securities (including securities pledged of $2,053 and $3,481)

 

6,900

 

 

6,915

 

 

Total available-for-sale securities

 

22,839

 

 

24,978

 

 

Loans held for sale

 

26,874

 

 

44,970

 

 

Loans held in portfolio

 

217,021

 

 

224,960

 

 

Allowance for loan and lease losses

 

(1,540

)

 

(1,630

)

 

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

 

215,481

 

 

223,330

 

 

Investment in Federal Home Loan Banks

 

2,230

 

 

2,705

 

 

Mortgage servicing rights

 

6,507

 

 

6,193

 

 

Goodwill

 

9,052

 

 

9,050

 

 

Other assets

 

19,386

 

 

19,937

 

 

Total assets

 

$

319,985

 

 

$

346,288

 

 

Liabilities

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

$

34,367

 

 

$

33,386

 

 

Interest-bearing deposits

 

175,842

 

 

180,570

 

 

Total deposits

 

210,209

 

 

213,956

 

 

Federal funds purchased and commercial paper

 

563

 

 

4,778

 

 

Securities sold under agreements to repurchase

 

8,323

 

 

11,953

 

 

Advances from Federal Home Loan Banks

 

24,735

 

 

44,297

 

 

Other borrowings

 

39,430

 

 

32,852

 

 

Other liabilities

 

9,694

 

 

9,035

 

 

Minority interests

 

2,453

 

 

2,448

 

 

Total liabilities

 

295,407

 

 

319,319

 

 

Stockholders’ Equity

 

 

 

 

 

 

 

Preferred stock, no par value: 600 shares authorized, 500 shares issued and outstanding ($1,000,000 per share liquidation preference)

 

492

 

 

492

 

 

Common stock, no par value: 1,600,000,000 shares authorized, 888,110,695 and 944,478,961 shares issued and outstanding

 

 

 

 

 

Capital surplus – common stock

 

3,121

 

 

5,825

 

 

Accumulated other comprehensive loss

 

(268

)

 

(287

)

 

Retained earnings

 

21,233

 

 

20,939

 

 

Total stockholders’ equity

 

24,578

 

 

26,969

 

 

Total liabilities and stockholders’ equity

 

$

319,985

 

 

$

346,288

 

 

 

See Notes to Consolidated Financial Statements.

2




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

 

Number
of
Common
Shares

 

Preferred
Stock

 

Capital
Surplus –
Common
Stock

 

Accumulated
Other
Comprehensive
Income (Loss)

 

Retained
Earnings

 

Total

 

 

 

(in millions)

 

BALANCE, December 31, 2005

 

 

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

 

 

 

 

 

 

 

 

 

 

 

985

 

985

 

Other comprehensive loss, net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

(208

)

 

 

(208

)

Net unrealized loss from cash flow hedging instruments

 

 

 

 

 

 

 

 

 

(10

)

 

 

(10

)

Minimum pension liability
adjustment

 

 

 

 

 

 

 

 

 

(1

)

 

 

(1

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

766

 

Cash dividends declared on common
stock

 

 

 

 

 

 

 

 

 

 

 

(499

)

(499

)

Common stock repurchased and retired

 

 

(47.0

)

 

 

 

 

(2,108

)

 

 

 

 

(2,108

)

Common stock issued

 

 

11.9

 

 

 

 

 

346

 

 

 

 

 

346

 

BALANCE, March 31, 2006

 

 

958.8

 

 

 

$

 

 

$

6,414

 

 

$

(448

)

 

$

19,853

 

$

25,819

 

BALANCE, December 31, 2006

 

 

944.5

 

 

 

$

492

 

 

$

5,825

 

 

$

(287

)

 

$

20,939

 

$

26,969

 

Cumulative effect from the adoption of FASB Interpretation No. 48

 

 

 

 

 

 

 

 

 

 

 

(6

)

(6

)

Adjusted balance

 

 

944.5

 

 

 

492

 

 

5,825

 

 

(287

)

 

20,933

 

26,963

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

784

 

784

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

7

 

 

 

7

 

Net unrealized gain from cash flow hedging instruments

 

 

 

 

 

 

 

 

 

13

 

 

 

13

 

Amortization of net loss and prior service cost from defined benefit plans

 

 

 

 

 

 

 

 

 

(1

)

 

 

(1

)

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

803

 

Cash dividends declared on common
stock

 

 

 

 

 

 

 

 

 

 

 

(477

)

(477

)

Cash dividends declared on preferred stock    

 

 

 

 

 

 

 

 

 

 

 

(7

)

(7

)

Common stock repurchased and retired

 

 

(61.4

)

 

 

 

 

(2,797

)

 

 

 

 

(2,797

)

Common stock issued

 

 

5.0

 

 

 

 

 

93

 

 

 

 

 

93

 

BALANCE, March 31, 2007

 

 

888.1

 

 

 

$

492

 

 

$

3,121

 

 

$

(268

)

 

$

21,233

 

$

24,578

 

 

See Notes to Consolidated Financial Statements.

3




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

 

Three Months Ended
March 31,

 

 

 

2007

 

2006

 

 

 

(in millions)

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$

784

 

$

985

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

Provision for loan and lease losses

 

234

 

82

 

Gain from home mortgage loans

 

(149

)

(160

)

Gain from credit card loans

 

(155

)

(46

)

(Gain) loss from available-for-sale securities

 

(35

)

1

 

Depreciation and amortization

 

163

 

196

 

Change in fair value of MSR

 

455

 

(3

)

Stock dividends from Federal Home Loan Banks

 

(33

)

(42

)

Capitalized interest income from option adjustable-rate mortgages

 

(361

)

(194

)

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

 

(27,880

)

(29,060

)

Proceeds from sales of loans originated and held for sale

 

27,267

 

34,681

 

Net (increase) decrease in trading assets

 

(797

)

2,084

 

Decrease in other assets

 

683

 

276

 

Increase (decrease) in other liabilities

 

124

 

(95

)

Net cash provided by operating activities

 

300

 

8,705

 

Cash Flows from Investing Activities

 

 

 

 

 

Purchases of available-for-sale securities

 

(1,366

)

(7,034

)

Proceeds from sales of available-for-sale securities

 

3,436

 

3,452

 

Principal payments and maturities on available-for-sale securities

 

586

 

790

 

Redemption of Federal Home Loan Bank stock

 

508

 

96

 

Origination and purchases of loans held in portfolio, net of principal payments

 

4,513

 

(8,781

)

Proceeds from sales of loans

 

21,381

 

324

 

Proceeds from sales of foreclosed assets

 

167

 

109

 

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

 

(4,536

)

(1,858

)

Purchases of premises and equipment, net

 

(44

)

(141

)

Net cash provided (used) by investing activities

 

24,645

 

(13,043

)

 

(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.)

 

Three Months Ended
March 31,

 

 

2007

 

2006

 

 

 

(in millions)

 

Cash Flows from Financing Activities

 

 

 

 

 

(Decrease) increase in deposits

 

$

(3,747

)

$

6,835

 

(Decrease) increase in short-term borrowings

 

(2,617

)

1,741

 

Proceeds from long-term borrowings

 

7,882

 

6,335

 

Repayments of long-term borrowings

 

(6,603

)

(6,926

)

Proceeds from advances from Federal Home Loan Banks

 

13,508

 

6,357

 

Repayments of advances from Federal Home Loan Banks

 

(33,072

)

(9,844

)

Proceeds from issuance of preferred securities by subsidiary

 

5

 

1,959

 

Cash dividends paid on preferred and common stock

 

(484

)

(499

)

Repurchase of common stock

 

(2,797

)

(2,108

)

Other

 

79

 

142

 

Net cash (used) provided by financing activities

 

(27,846

)

3,992

 

Decrease in cash and cash equivalents

 

(2,901

)

(346

)

Cash and cash equivalents, beginning of period

 

6,948

 

6,214

 

Cash and cash equivalents, end of period

 

$

4,047

 

$

5,868

 

Noncash Activities

 

 

 

 

 

Loans exchanged for mortgage-backed securities

 

$

114

 

$

437

 

Real estate acquired through foreclosure

 

276

 

143

 

Loans transferred from held for sale to held in portfolio

 

998

 

2,510

 

Loans transferred from held in portfolio to held for sale

 

2,736

 

504

 

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

 

 

858

 

Cash Paid During the Period For

 

 

 

 

 

Interest on deposits

 

$

1,735

 

$

1,142

 

Interest on borrowings

 

1,351

 

1,304

 

Income taxes

 

475

 

71

 

 

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”, the “Company”, “we”, “us” or “our”). The Company’s financial reporting and accounting policies conform to accounting principles generally accepted in the United States of America (“GAAP”), which include certain practices of the banking industry. All significant intercompany transactions and balances have been eliminated in preparing the consolidated financial statements.

Certain amounts in prior periods have been reclassified to conform to the current period’s presentation. In particular, during the second quarter of 2006, we reclassified our allocable share of operating losses in low income housing partnerships from noninterest expense to other income. Operating losses reclassified totaled $20 million for the three months ended March 31, 2006. Such losses totaled $24 million for the three months ended March 31, 2007.

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 2006 Annual Report on Form 10-K.

Recently Issued Accounting Standards Not Yet Adopted

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement No. 157, Fair Value Measurements (“Statement No. 157”) . Statement No. 157 prescribes a definition of the term “fair value,” establishes a framework for measuring fair value and expands disclosure about fair value measurements. Statement No. 157 is effective for fiscal years beginning after November 15, 2007. We do not expect the application of Statement No. 157 to have a material effect on the Consolidated Statements of Income and the Consolidated Statements of Financial Condition.

In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“Statement No. 159”). Statement No. 159 permits an instrument by instrument election to account for selected financial assets and liabilities at fair value. Statement No. 159 is effective for fiscal years beginning after November 15, 2007. We are currently evaluating the impact that Statement No. 159 will have on the Consolidated Statements of Income and the Consolidated Statements of Financial Condition.

Note 2:  Discontinued Operations

On December 31, 2006, the Company exited the retail mutual fund management business and completed the sale of WM Advisors, Inc., realizing a pretax gain of $667 million ($415 million, net of tax). WM Advisors provided investment management, distribution and shareholder services to the WM Group of Funds. Accordingly, this former subsidiary has been accounted for as a discontinued operation and its results of operations have been removed from the Company’s results of continuing operations for all periods presented on the Consolidated Statements of Income and in Notes 8 and 9 to the Consolidated Financial Statements – “Operating Segments” and “Condensed Consolidating Financial Statements”, and are presented in the aggregate as discontinued operations.

6




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

Note 3:  Mortgage Banking Activities

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

 

Three Months Ended
March 31,

 

 

 

2007

 

2006

 

 

 

(in millions)

 

Revenue from sales and servicing of home mortgage loans:

 

 

 

 

 

Sales activity:

 

 

 

 

 

Gain from home mortgage loans and originated mortgage-backed securities (1)

 

$

149

 

$

166

 

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

 

(54

)

43

 

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

 

95

 

209

 

Servicing activity:

 

 

 

 

 

Home mortgage loan servicing revenue (2)

 

514

 

572

 

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

 

(356

)

(409

)

Change in MSR fair value due to valuation inputs or assumptions

 

(96

)

413

 

Revaluation loss from derivatives economically hedging MSR

 

(32

)

(522

)

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

 

30

 

54

 

Total revenue from sales and servicing of home mortgage loans

 

$

125

 

$

263

 


(1)                  Originated mortgage-backed securities represent available-for-sale securities retained on the balance sheet subsequent to the securitization of mortgage loans that were originated by the Company.

(2)                  Includes contractually specified servicing fees, late charges and loan pool expenses (the shortfall of the scheduled interest required to be remitted to investors and that which is collected from borrowers upon payoff).

Changes in the balance of MSR were as follows:

 

Three Months Ended
March 31,

 

 

 

2007

 

2006

 

 

 

(in millions)

 

Balance, beginning of period

 

$

6,193

 

$

8,041

 

Home loans:

 

 

 

 

 

Additions

 

760

 

633

 

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

 

(356

)

(409

)

Change in MSR fair value due to valuation inputs or assumptions

 

(96

)

413

 

Fair value basis adjustment (1)

 

 

57

 

Net change in commercial real estate MSR

 

6

 

1

 

Balance, end of period

 

$

6,507

 

$

8,736

 


(1)                  Pursuant to the adoption of Statement No. 156 on January 1, 2006, the Company applied the fair value method of accounting to its mortgage servicing assets, and the $57 million difference between amortized cost and fair value was recorded as an increase to the basis of the Company’s MSR.

7




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
March 31,

 

 

 

2007

 

2006

 

 

 

(in millions)

 

Balance, beginning of period

 

$

444,696

 

$

563,208

 

Home loans:

 

 

 

 

 

Additions

 

44,550

 

35,026

 

Loan payments and other

 

(22,469

)

(29,063

)

Net change in commercial real estate loans

 

1,005

 

330

 

Balance, end of period

 

$

467,782

 

$

569,501

 

 

Note 4:  Income Taxes

The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”), on January 1, 2007. FIN 48 requires that a tax benefit be recognized only if it is “more likely than not” that it will be realized, 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. As a result of the implementation of FIN 48, the Company recognized an approximate $6 million increase in the liability for unrecognized tax benefits, which was accounted for as a reduction to the January 1, 2007 balance of retained earnings.

The total amount of unrecognized tax benefits as of the date of adoption on January 1, 2007 was $1.41 billion, of which $814 million of unrecognized tax benefits would favorably affect the effective tax rate if recognized.

The Company records interest expense and penalties related to unrecognized tax benefits as a component of income tax expense. At January 1, 2007, the Company had accrued $105 million and $47 million for the potential payments of interest and penalties.

The Company has recorded income tax receivables representing tax refund claims for periods through December 31, 2005. Interest income is accrued on these receivables and is reported as a component of noninterest income. As of January 1, 2007 and March 31, 2007, accrued interest income totaled $295 million and $334 million.

The Company, including certain of its subsidiaries, files income tax returns in the U.S. federal jurisdiction, various state jurisdictions, and the United Kingdom. Some acquired subsidiaries continue to be subject to both federal and state examinations for periods prior to their acquisition. Generally, the Company is no longer subject to U.S. federal, state, or United Kingdom income tax examinations by tax authorities for years prior to 1998.

In 2005, the Internal Revenue Service (“IRS”) completed the examination of the Company’s federal income tax returns for the years 1998 through 2000. Selected issues were referred to the IRS Appeals Division for review. During 2006 all asserted deficiencies were resolved in principle, and their resolution did not materially affect the Company’s 2006 Consolidated Financial Statements. The remaining issue involves a claim for refund with respect to certain tax sharing payments to the FDIC. It is reasonably possible that this issue could be resolved within the next twelve months. At this point in time the Company is unable to estimate a range of possible settlements.

In addition, it is reasonably possible that within the next twelve months the Company will settle an asserted deficiency by the UK Inland Revenue with respect to tax due on the sale of credit card operations

8




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

by a subsidiary of Providian Financial Corporation. The range of the possible settlement is estimated to be $21 million to $31 million.

Note 5:  Guarantees

In the ordinary course of business, the Company sells loans to third parties and in certain circumstances, such as in the event of first payment default, retains credit risk exposure on those loans and may be required to repurchase them. The Company may also be required to repurchase sold loans when representations and warranties made by the Company in connection with those sales are breached. When a loan sold to an investor 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 breach of a representation or warranty made to the investor in connection with the Company’s sale of the loan, then if the breach had a material adverse effect on the value of the loan, the Company will be required to either repurchase the loan or indemnify the investors for losses sustained. The Company has recorded loss contingency reserves of $182 million as of March 31, 2007 and $202 million as of December 31, 2006 to cover the estimated loss exposure related to potential loan repurchases.

In connection with the sale of its retail mutual fund management business, WM Advisors, Inc., the Company provided a guarantee under which it is committed to make certain payments to the purchaser in each of the four years following the closing of the sale on December 31, 2006 in the event that certain fee revenue targets are not met. The fee revenue targets are based on the Company’s sales of mutual funds and other financial products that are managed by the purchaser. The Company’s maximum potential future payments total $30 million per year for each of the four years following the sale. At the end of the four-year period, the Company can recover all or a portion of the payments made under the guarantee if the aforementioned fee revenues during the four-year period meet or exceed certain targets. The estimated fair value of the guarantee was recorded at December 31, 2006. The carrying amount of the guarantee will be amortized ratably over the four-year period and at each reporting date the Company will evaluate the recognition of a loss contingency. The loss contingency is measured as the probable and reasonably estimable amount, if any, that exceeds the amortized value of the remaining guarantee.

Note 6:  Common Stock

At March 31, 2007, the Company was authorized to issue 1.6 billion shares with no par value. Share activity is as follows:

 

Three Months Ended
March 31,

 

 

 

2007

 

2006

 

 

 

(in millions)

 

Shares outstanding, beginning of period

 

944.5

 

993.9

 

Issued:

 

 

 

 

 

Stock-based compensation plans

 

4.8

 

7.2

 

Employee stock purchase plan

 

0.2

 

0.2

 

Subordinated note conversion

 

 

4.5

 

Total shares issued

 

5.0

 

11.9

 

Repurchased and retired (1)

 

(61.4

)

(47.0

)

Shares outstanding, end of period

 

888.1

 

958.8

 


(1)                  Includes shares repurchased through accelerated share repurchase programs of 59.5 million and 34.0 million during the three months ended March 31, 2007 and 2006.

9




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

Share Repurchases

As part of its capital management activities, from time to time the Company will repurchase shares to deploy excess capital. Share repurchases can occur in the open market or through accelerated share repurchase programs.

On January 3, 2007, the Company repurchased 59.5 million shares of its common stock from a broker-dealer counterparty under an accelerated share repurchase transaction at an initial cost of $2.72 billion. As part of the transaction, the Company simultaneously entered into a forward contract indexed to the price of the Company’s common stock, which subjects the transaction to a future price adjustment. Upon settlement of the contract, which is scheduled to occur on August 13, 2007, the price adjustment will be calculated based upon the difference between the actual weighted daily average share price of the Company’s common stock during the life of the contract, and $45.45 per common share. If the difference is positive, the Company may, at its election, settle the contract by either paying cash or by issuing common shares to the counterparty. If the difference is negative, the counterparty will settle the contract by delivering shares of Washington Mutual, Inc. common stock to the Company. In no event will the number of additional shares used to settle the transaction exceed 60 million shares. If the contract had actually been settled on March 31, 2007, the Company would have received approximately 3.3 million additional common shares from the counterparty, thereby effectively reducing the price of the shares repurchased to $43.06 per share. Accordingly, this transaction had no effect on average diluted common shares outstanding in the first quarter of 2007, since the hypothetical settlement of the forward contract on March 31 would have been accretive to diluted earnings per share.

Note 7:  Earnings Per Common Share

Information used to calculate earnings per common share was as follows:

 

 

Three Months Ended
March 31,

 

 

 

2007

 

2006

 

 

 

(in thousands)

 

Weighted average common shares:

 

 

 

 

 

Basic weighted average number of common shares outstanding

 

874,816

 

973,614

 

Dilutive effect of potential common shares from:

 

 

 

 

 

Awards granted under equity incentive programs

 

13,212

 

16,743

 

Common stock warrants

 

10,501

 

10,437

 

Convertible debt

 

1,177

 

2,666

 

Diluted weighted average number of common shares outstanding

 

899,706

 

1,003,460

 

 

For the three months ended March 31, 2007 and 2006, options to purchase an additional 18.3 million and 18.7 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., 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. The escrow is currently scheduled to 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 March 31, 2007, 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.

10




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

Note 8:  Operating Segments

The Company has four operating segments for the purpose of management reporting:  the Retail Banking Group, the Card Services Group, the Commercial Group and the Home Loans Group. The Retail Banking Group, the Card Services Group and the Home Loans Group are consumer-oriented while the Commercial Group serves commercial customers. In addition, the category of Corporate Support/Treasury and Other includes the community lending and investment operations as well as the Treasury function – which manages the Company’s interest rate risk, liquidity position and capital. The Corporate Support function provides facilities, legal, accounting and finance, human resources and technology services. The activities of the Enterprise Risk Management function, which oversees the identification, measurement, monitoring, control and reporting of credit, market and operational risk, are also reported in this category.

In the fourth quarter of 2006, the Company adopted several new management accounting methodologies for segment reporting, the most significant of which were the adoption of a revised funds transfer pricing methodology that better reflects current market interest rates and deposit pricing, and a new provisioning methodology that eliminates the distinction that existed in prior years between management accounting and financial accounting. The segment results for the first quarter of 2006 have been restated to reflect these revisions.

The principal activities of the Retail Banking Group include:  (1) offering a comprehensive line of deposit and other retail banking products and services to consumers and small businesses; (2) holding both the Company’s portfolio of home loans held for investment and the substantial majority of its portfolio of home equity loans and lines of credit (but not the Company’s portfolio of mortgage loans to higher risk borrowers originated or purchased through the subprime mortgage channel); (3) originating home equity loans and lines of credit; and (4) providing investment advisory and brokerage services, sales of annuities and other financial services.

Deposit products offered to consumers and small businesses include the Company’s signature free checking and interest-bearing Platinum checking accounts, as well as other personal checking, savings, money market deposit and time deposit accounts. Many products are offered online and in retail banking stores. Financial consultants provide investment advisory and securities brokerage services to the public.

On December 31, 2006, the Company sold its retail mutual fund management business, WM Advisors, Inc. The results of operations of WM Advisors for the three months ended March 31, 2006 are reported within the Retail Banking Group’s results as discontinued operations.

The Card Services Group manages the Company’s credit card operations. The segment’s principal activities include (1) issuing credit cards; (2) either holding outstanding balances on credit cards in portfolio or securitizing and selling them; (3) servicing credit card accounts; and (4) providing other cardholder services. Credit card balances that are held in the Company’s loan portfolio generate interest income from finance charges on outstanding card balances, and noninterest income from the collection of fees associated with the credit card portfolio, such as performance fees (late, overlimit and returned check charges) and cash advance and balance transfer fees.

When credit card balances are securitized, they are sold to a qualifying special-purpose entity (“QSPE”), typically a securitization trust. The QSPE issues asset-backed securities that are secured by the future expected cash flows on the sold balances. Cash proceeds from the sale of those securities to third parties are received by the Company and the cost basis of the securitized balances, which were reduced by the loan loss allowance attributable to such balances, are removed from the balance sheet. The resulting gain from the securitization and sale, along with the ensuing fee income associated with the Company’s

11




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

retention of servicing responsibilities on the securitized balances, are reported as revenue from sales and servicing of consumer loans in noninterest income. Certain interests in the securitized balances are retained by the Company and are classified as trading assets on the balance sheet, with changes in the fair value of those retained interests recognized in current period earnings. The mix at any point in time between the amount of credit card balances held in the loan portfolio and those that have been securitized and sold is influenced by market conditions, the Company’s evaluation of capital deployment alternatives and liquidity factors.

The Card Services Group acquires new customers primarily by leveraging the Company’s retail banking distribution network and through direct mail solicitations, augmented by online and telemarketing activities and other marketing programs including affinity programs. In addition to credit cards, this segment markets a variety of other products to its customer base.

The Company evaluates the performance of the Card Services Group on a managed asset basis. Managed financial information is derived by adjusting the GAAP financial information to add back securitized loan balances and the related interest, fee income and provision for credit losses.

The principal activities of the Commercial Group include:  (1) providing financing to developers and investors, or acquiring loans for the purchase or refinancing of multi-family dwellings and other commercial properties; (2) either holding multi-family and other commercial real estate loans in portfolio or selling these loans while retaining the servicing rights; (3) providing limited deposit services to commercial customers; and (4) providing Internal Revenue Service Section 1031 exchange services to income property investors.

In response to the current interest rate environment, customer preferences have been changing away from adjustable-rate loans towards hybrid and fixed-rate loans. Accordingly, and consistent with the Company’s desire to manage its exposure to interest rate risk, the Commercial Group’s business model has evolved and most hybrid and fixed rate multi-family and other commercial real estate loans are being directed to held for sale and subsequently sold.

The principal activities of the Home Loans Group include:  (1) originating and servicing home loans; (2) managing the Company’s capital market operations – which includes the buying and selling of all types of mortgage loans in the secondary market; (3) the fulfillment and servicing of the Company’s portfolio of home equity loans and lines of credit; (4) originating and purchasing mortgage loans to higher risk borrowers through the subprime mortgage channel; (5) providing financing and other banking services to mortgage bankers for the origination of mortgage loans; and (6) making available insurance-related products and participating in reinsurance activities with other insurance companies.

The segment offers a wide variety of real-estate secured residential loan products and services primarily consisting of fixed-rate home loans, adjustable-rate home loans or “ARMs”, hybrid home loans, Option ARM loans and mortgage loans to higher risk borrowers through the subprime mortgage channel. Such loans are either held in portfolio by the Home Loans Group, sold to secondary market participants or transferred through inter-segment sales to the Retail Banking Group. The decision to retain or sell loans, and the related decision to retain or not retain servicing when loans are sold, involves the analysis and comparison of expected interest income and the interest rate and credit risks inherent with holding loans in portfolio, with the expected servicing fees, the size of the gain or loss that would be realized if the loans were sold and the expected expense of managing the risk related to any retained mortgage servicing rights.

As part of its capital market activities, the Home Loans Group also generates both interest income and noninterest income through its conduit operations. Under the conduit program, the Company

12




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

purchases loans from other lenders, warehouses the loans for a period of time and sells the loans in the form of whole loans, private label mortgage-backed securities or agency-guaranteed securities. The Company recognizes a gain or loss at the time the loans are sold and receives interest income while the loans are held for sale. The Company also provides ongoing servicing and bond administration for all securities issued.

The principal activities of, and charges reported in, the Corporate Support/Treasury and Other category include:

·         enterprise-wide management of the Company’s interest rate risk, liquidity position and capital. These responsibilities involve managing a majority of the Company’s portfolio of investment securities and providing oversight and direction across the enterprise over matters that impact the profile of the Company’s balance sheet. Such matters include determining the optimal product composition of loans that the Company holds in 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;

·         enterprise-wide management of the identification, measurement, monitoring, control and reporting of credit, market and operational risk;

·         community lending and investment activities, which help fund the development of affordable housing units in traditionally underserved communities;

·         general corporate overhead costs associated with the Company’s technology services, facilities, legal, human resources and accounting and finance functions;

·         costs that the Company’s chief operating decision maker did not consider when evaluating  the performance of the Company’s four operating segments, including costs associated with the Company’s productivity and efficiency initiatives;

·         the impact of changes in the unallocated allowance for loan and lease losses;

·         the net impact of funds transfer pricing for loan and deposit balances; and

·         items associated with transfers of loans from the Retail Banking Group to the Home Loans Group when home loans previously designated as held for investment are transferred to held for sale, such as lower of cost or fair value adjustments and the write-off of inter-segment premiums.

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:

·         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 takes into account the interest rate risk profile of the Company’s assets and liabilities and concentrates their sensitivities within the Treasury Division, where it is centrally managed. Certain basis and other residual risk remains in the operating segments;

13




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

·         the allocation of charges for services rendered to certain segments by functions centralized within another segment, as well as the allocation of certain operating expenses that are not directly charged to the segments (i.e., corporate overhead), which generally are based on each segment’s consumption patterns;

·         the allocation of goodwill and other intangible assets to the operating segments based on benefits received from each acquisition; and

·         inter-segment activities which include the transfer of certain originated home and home equity loans that are to be held in portfolio from the Home Loans Group to the Retail Banking Group and a broker fee arrangement between Home Loans and Retail Banking. When originated home and home equity 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 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 through Corporate Support/Treasury and Other. Inter-segment broker fees are recorded by the Retail Banking Group when home loans are initiated through retail banking 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.

14




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

Financial highlights by operating segment were as follows:

 

Three Months Ended March 31, 2007

 

 

 

Retail
Banking

 

Card
Services

 

Commercial

 

Home
Loans

 

Corporate
Support/
Treasury
and

 

Reconciling Adjustments

 

 

 

 

 

Group

 

Group (1)

 

Group

 

Group

 

Other

 

Securitization (2)

 

Other

 

Total

 

 

 

(dollars in millions)

 

Condensed income statement:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

1,275

 

 

$

653

 

 

 

$

200

 

 

$

245

 

 

$

(15

)

 

 

$

(414

)

 

$

137

(3)

$

2,081

 

Provision for loan and lease losses

 

62

 

 

388

 

 

 

(10

)

 

49

 

 

27

 

 

 

(282

)

 

 

234

 

Noninterest income (expense)

 

751

 

 

474

 

 

 

14

 

 

162

 

 

81

 

 

 

132

 

 

(73

) (4)

1,541

 

Inter-segment revenue (expense)

 

22

 

 

(4

)

 

 

 

 

(18

)

 

 

 

 

 

 

 

 

Noninterest expense

 

1,075

 

 

325

 

 

 

74

 

 

521

 

 

110

 

 

 

 

 

 

2,105

 

Minority interest expense

 

 

 

 

 

 

 

 

 

 

43

 

 

 

 

 

 

43

 

Income (loss) from continuing operations before income taxes

 

911

 

 

410

 

 

 

150

 

 

(181

)

 

(114

)

 

 

 

 

64

 

1,240

 

Income taxes (benefit)

 

342

 

 

154

 

 

 

56

 

 

(68

)

 

(71

)

 

 

 

 

43

(5)

456

 

Net income (loss)

 

$

569

 

 

$

256

 

 

 

$

94

 

 

$

(113

)

 

$

(43

)

 

 

$

 

 

$

21

 

$

784

 

Performance and other data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average loans

 

$

155,206

 

 

$

23,604

 

 

 

$

38,641

 

 

$

53,254

 

 

$

1,345

 

 

 

$

(12,507

)

 

$

(1,479

) (6)

$

258,064

 

Average assets

 

165,047

 

 

26,039

 

 

 

41,001

 

 

71,381

 

 

40,877

 

 

 

(10,961

)

 

(1,479

) (6)

331,905

 

Average deposits

 

144,030

 

 

n/a

 

 

 

3,762

 

 

16,767

 

 

46,205

 

 

 

n/a

 

 

n/a

 

210,764

 


(1)                     Operating results for the Card Services Group are presented on a managed basis as the Company treats securitized and sold credit card receivables as if they were still on the balance sheet in evaluating the overall performance of this operating segment.

(2)                     The managed basis presentation of the Card Services Group is derived by adjusting the GAAP financial information to add back securitized loan balances and the related interest, fee income and provision for credit losses. Such adjustments to arrive at the reported GAAP results are eliminated within Securitization Adjustments.

(3)                     Represents the difference between mortgage loan premium amortization recorded by the Retail Banking Group and the amount recognized in the Company’s Consolidated Statements of Income. For management reporting purposes, certain mortgage loans that are held in portfolio by the Retail Banking 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 Group reflects this assumed profit factor and must therefore be eliminated as a reconciling adjustment.

(4)                     Represents the difference between gain from mortgage loans recorded by the Home Loans Group and gain from mortgage loans recognized in the Company’s Consolidated Statement of Income. A substantial amount of loans originated or purchased by this segment are considered to be salable for management reporting purposes.

(5)                     Represents the tax effect of reconciling adjustments.

(6)                     Represents the inter-segment offset for inter-segment loan premiums that the Retail Banking Group recognized upon transfer of portfolio loans from the Home Loans Group.

15




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

 

Three Months Ended March 31, 2006

 

 

 

Retail
Banking

 

Card
Services

 

Commercial

 

Home
Loans

 

Corporate
Support/
Treasury
and

 

Reconciling Adjustments

 

 

 

 

 

Group

 

Group (1)

 

Group

 

Group

 

Other

 

Securitization (2)

 

Other

 

Total

 

 

 

(dollars in millions)

 

Condensed income statement:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

1,347

 

 

$

619

 

 

 

$

163

 

 

$

338

 

 

$

(44

)

 

 

$

(432

)

 

$

126

(3)

$

2,117

 

Provision for loan and lease losses

 

54

 

 

330

 

 

 

 

 

21

 

 

(98

)

 

 

(225

)

 

 

82

 

Noninterest income (expense)

 

670

 

 

344

 

 

 

12

 

 

401

 

 

150

 

 

 

207

 

 

(146

) (4)

1,638

 

Inter-segment revenue (expense)

 

13

 

 

 

 

 

 

 

(13

)

 

 

 

 

 

 

 

 

Noninterest expense

 

1,088

 

 

298

 

 

 

67

 

 

621

 

 

64

 

 

 

 

 

 

2,138

 

Income (loss) from continuing operations before income taxes

 

888

 

 

335

 

 

 

108

 

 

84

 

 

140

 

 

 

 

 

(20

)

1,535

 

Income taxes (benefit)

 

340

 

 

128

 

 

 

41

 

 

32

 

 

33

 

 

 

 

 

(15

) (5)

559

 

Income (loss) from continuing operations  

 

548

 

 

207

 

 

 

67

 

 

52

 

 

107

 

 

 

 

 

(5

)

976

 

Income from discontinued
operations

 

9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

9

 

Net income (loss)

 

$

557

 

 

$

207

 

 

 

$

67

 

 

$

52

 

 

$

107

 

 

 

$

 

 

$

(5

)

$

985

 

Performance and other data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average loans

 

$

173,852

 

 

$

20,086

 

 

 

$

31,011

 

 

$

49,913

 

 

$

1,142

 

 

 

$

(12,107

)

 

$

(1,571

) (6)

$

262,326

 

Average assets

 

184,147

 

 

22,764

 

 

 

33,334

 

 

78,163

 

 

37,042

 

 

 

(10,219

)

 

(1,571

) (6)

343,660

 

Average deposits

 

139,060

 

 

n/a

 

 

 

2,259

 

 

16,532

 

 

33,183

 

 

 

n/a

 

 

n/a

 

191,034

 


(1)                     Operating results for the Card Services Group are presented on a managed basis as the Company treats securitized and sold credit card receivables as if they were still on the balance sheet in evaluating the overall performance of this operating segment.

(2)                     The managed basis presentation of the Card Services Group is derived by adjusting the GAAP financial information to add back securitized loan balances and the related interest, fee income and provision for credit losses. Such adjustments to arrive at the reported GAAP results are eliminated within Securitization Adjustments.

(3)                     Represents the difference between mortgage loan premium amortization recorded by the Retail Banking Group and the amount recognized in the Company’s Consolidated Statements of Income. For management reporting purposes, certain mortgage loans that are held in portfolio by the Retail Banking 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 Group reflects this assumed profit factor and must therefore be eliminated as a reconciling adjustment.

(4)                     Represents the difference between gain from mortgage loans recorded by the Home Loans Group and gain from mortgage loans recognized in the Company’s Consolidated Statement of Income. A substantial amount of loans originated or purchased by this segment are considered to be salable for management reporting purposes.

(5)                     Represents the tax effect of reconciling adjustments.

(6)                     Represents the inter-segment offset for inter-segment loan premiums that the Retail Banking Group recognized upon transfer of portfolio loans from the Home Loans Group.

16




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

Note 9: Condensed Consolidating Financial Statements

The following are the condensed consolidating financial statements of the parent companies of Washington Mutual, Inc. and New American Capital, Inc.

CONDENSED CONSOLIDATING STATEMENTS OF INCOME

 

Three Months Ended March 31, 2007

 

 

Washington
Mutual, Inc.
(Parent Only)

 

New
American
Capital, Inc.
(Parent Only)

 

All Other
Washington
Mutual, Inc.
Consolidating
Subsidiaries

 

Eliminations

 

Washington
Mutual, Inc.
Consolidated

 

 

 

(in millions)

 

Interest Income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes receivable from subsidiaries

 

 

$

1

 

 

 

$

11

 

 

 

$

7

 

 

 

$

(19

)

 

 

$

 

 

Other interest income

 

 

2

 

 

 

 

 

 

5,005

 

 

 

1

 

 

 

5,008

 

 

Total interest income

 

 

3

 

 

 

11

 

 

 

5,012

 

 

 

(18

)

 

 

5,008

 

 

Interest Expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Borrowings

 

 

144

 

 

 

5

 

 

 

1,025

 

 

 

(19

)

 

 

1,155

 

 

Other interest expense

 

 

 

 

 

 

 

 

1,776

 

 

 

(4

)

 

 

1,772

 

 

Total interest expense

 

 

144

 

 

 

5

 

 

 

2,801

 

 

 

(23

)

 

 

2,927

 

 

Net interest income (expense)

 

 

(141

)

 

 

6

 

 

 

2,211

 

 

 

5

 

 

 

2,081

 

 

Provision for loan and lease losses

 

 

 

 

 

 

 

 

234

 

 

 

 

 

 

234

 

 

Net interest income (expense) after provision for loan and lease losses

 

 

(141

)

 

 

6

 

 

 

1,977

 

 

 

5

 

 

 

1,847

 

 

Noninterest Income (Expense)

 

 

15

 

 

 

(13

)

 

 

1,540

 

 

 

(1

)

 

 

1,541

 

 

Noninterest Expense

 

 

34

 

 

 

1

 

 

 

2,069

 

 

 

1

 

 

 

2,105

 

 

Minority interest expense

 

 

 

 

 

 

 

 

43

 

 

 

 

 

 

43

 

 

Income (loss) before income taxes, dividends from subsidiaries and equity in undistributed loss of subsidiaries

 

 

(160

)

 

 

(8

)

 

 

1,405

 

 

 

3

 

 

 

1,240

 

 

Income tax expense (benefit)

 

 

(21

)

 

 

(4

)

 

 

481

 

 

 

 

 

 

456

 

 

Dividends from subsidiaries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Bank subsidiary

 

 

 

 

 

3,004

 

 

 

 

 

 

(3,004

)

 

 

 

 

Non-bank subsidiaries

 

 

3,000

 

 

 

 

 

 

 

 

 

(3,000

)

 

 

 

 

Equity in undistributed loss of subsidiaries  

 

 

(2,077

)

 

 

(2,084

)

 

 

 

 

 

4,161

 

 

 

 

 

Net Income

 

 

$

784

 

 

 

$

916

 

 

 

$

924

 

 

 

$

(1,840

)

 

 

$

784

 

 

 

17




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

 

Three Months Ended March 31, 2006

 

 

Washington
Mutual, Inc.
(Parent Only)

 

New
American
Capital, Inc.
(Parent Only)

 

All Other
Washington
Mutual, Inc.
Consolidating
Subsidiaries

 

Eliminations

 

Washington
Mutual, Inc.
Consolidated

 

 

 

(in millions)

 

Interest Income