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, 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
incorporation or organization)

 

(I.R.S. Employer
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 July 31, 2007:

Common Stock – 870,584,006 (1)

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

 




WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2007
TABLE OF CONTENTS

 

Page

 

PART I – Financial Information

 

 

1

 

 

Item 1.    Financial Statements

 

 

 

 

 

Consolidated Statements of Income (Unaudited) – 
Three and Six Months Ended June 30, 2007 and 2006

 

 

1

 

 

Consolidated Statements of Financial Condition (Unaudited) – 
June 30, 2007 and December 31, 2006

 

 

2

 

 

Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Unaudited) – 
Six Months Ended June 30, 2007 and 2006

 

 

3

 

 

Consolidated Statements of Cash Flows (Unaudited) – 
Six Months Ended June 30, 2007 and 2006

 

 

4

 

 

Notes to Consolidated Financial Statements (Unaudited)

 

 

6

 

 

Note 1: Accounting Policies

 

 

6

 

 

Note 2: Discontinued Operations

 

 

6

 

 

Note 3: Mortgage Banking Activities

 

 

7

 

 

Note 4: Income Taxes

 

 

8

 

 

Note 5: Guarantees

 

 

9

 

 

Note 6: Common Stock

 

 

10

 

 

Note 7: Earnings Per Common Share

 

 

11

 

 

Note 8: Operating Segments

 

 

12

 

 

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

 

 

19

 

 

Cautionary Statements

 

 

19

 

 

Controls and Procedures

 

 

20

 

 

Overview

 

 

21

 

 

Critical Accounting Estimates

 

 

22

 

 

Recently Issued Accounting Standards Not Yet Adopted

 

 

23

 

 

Summary Financial Data

 

 

24

 

 

Earnings Performance from Continuing Operations

 

 

25

 

 

Review of Financial Condition

 

 

34

 

 

Operating Segments

 

 

37

 

 

Off-Balance Sheet Activities

 

 

42

 

 

Capital Adequacy

 

 

43

 

 

Risk Management

 

 

43

 

 

Credit Risk Management

 

 

44

 

 

Liquidity Risk and Capital Management

 

 

48

 

 

Market Risk Management

 

 

52

 

 

Operational Risk Management

 

 

56

 

 

Item 3.    Quantitative and Qualitative Disclosures About Market Risk

 

 

52

 

 

Item 4.    Controls and Procedures

 

 

20

 

 

PART II – Other Information

 

 

57

 

 

Item 1.    Legal Proceedings

 

 

57

 

 

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

 

 

58

 

 

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

 

 

58

 

 

Item 6.    Exhibits

 

 

59

 

 

 

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,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in millions, except per share amounts)

 

Interest Income

 

 

 

 

 

 

 

 

 

Loans held for sale

 

$

421

 

$

395

 

$

984

 

$

856

 

Loans held in portfolio

 

3,786

 

3,887

 

7,686

 

7,468

 

Available-for-sale securities

 

351

 

368

 

682

 

690

 

Trading assets

 

108

 

165

 

221

 

363

 

Other interest and dividend income

 

82

 

120

 

183

 

215

 

Total interest income

 

4,748

 

4,935

 

9,756

 

9,592

 

Interest Expense

 

 

 

 

 

 

 

 

 

Deposits

 

1,723

 

1,461

 

3,495

 

2,682

 

Borrowings

 

991

 

1,414

 

2,146

 

2,734

 

Total interest expense

 

2,714

 

2,875

 

5,641

 

5,416

 

Net interest income

 

2,034

 

2,060

 

4,115

 

4,176

 

Provision for loan and lease losses

 

372

 

224

 

606

 

306

 

Net interest income after provision for loan and lease losses

 

1,662

 

1,836

 

3,509

 

3,870

 

Noninterest Income

 

 

 

 

 

 

 

 

 

Revenue from sales and servicing of home mortgage loans

 

300

 

222

 

425

 

486

 

Revenue from sales and servicing of consumer loans

 

403

 

424

 

846

 

801

 

Depositor and other retail banking fees

 

720

 

641

 

1,385

 

1,219

 

Credit card fees

 

183

 

152

 

355

 

291

 

Securities fees and commissions

 

70

 

56

 

131

 

108

 

Insurance income

 

29

 

33

 

58

 

66

 

Loss on trading assets

 

(145

)

(129

)

(253

)

(142

)

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

 

7

 

 

41

 

(8

)

Other income

 

191

 

179

 

311

 

395

 

Total noninterest income

 

1,758

 

1,578

 

3,299

 

3,216

 

Noninterest Expense

 

 

 

 

 

 

 

 

 

Compensation and benefits

 

977

 

1,021

 

1,979

 

2,054

 

Occupancy and equipment

 

354

 

435

 

731

 

826

 

Telecommunications and outsourced information services

 

132

 

145

 

261

 

279

 

Depositor and other retail banking losses

 

58

 

51

 

119

 

108

 

Advertising and promotion

 

113

 

117

 

211

 

211

 

Professional fees

 

55

 

45

 

93

 

81

 

Other expense

 

449

 

415

 

850

 

808

 

Total noninterest expense

 

2,138

 

2,229

 

4,244

 

4,367

 

Minority interest expense

 

42

 

37

 

85

 

37

 

Income from continuing operations before income taxes

 

1,240

 

1,148

 

2,479

 

2,682

 

Income taxes

 

410

 

389

 

865

 

947

 

Income from continuing operations

 

830

 

759

 

1,614

 

1,735

 

Discontinued Operations

 

 

 

 

 

 

 

 

 

Income from discontinued operations before income taxes

 

 

12

 

 

27

 

Income taxes

 

 

4

 

 

10

 

Income from discontinued operations

 

 

8

 

 

17

 

Net Income

 

$

830

 

$

767

 

$

1,614

 

$

1,752

 

Net Income Available to Common Stockholders

 

$

822

 

$

767

 

$

1,599

 

$

1,752

 

Basic Earnings Per Common Share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.95

 

$

0.80

 

$

1.83

 

$

1.81

 

Income from discontinued operations

 

 

0.01

 

 

0.02

 

Net income

 

0.95

 

0.81

 

1.83

 

1.83

 

Diluted Earnings Per Common Share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.92

 

$

0.78

 

$

1.78

 

$

1.75

 

Income from discontinued operations

 

 

0.01

 

 

0.02

 

Net income

 

0.92

 

0.79

 

1.78

 

1.77

 

Dividends declared per common share

 

0.55

 

0.51

 

1.09

 

1.01

 

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

 

868,968

 

947,023

 

871,876

 

960,245

 

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

 

893,090

 

975,504

 

896,304

 

989,408

 

 

See Notes to Consolidated Financial Statements.

1




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

 

 

June 30,
2007

 

December 31,
2006

 

 

 

(dollars in millions)

 

Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

4,167

 

 

$

6,948

 

 

Federal funds sold and securities purchased under agreements to resell

 

3,267

 

 

3,743

 

 

Trading assets (including securities pledged of $3,115 and $1,868)

 

5,534

 

 

4,434

 

 

Available-for-sale securities, total amortized cost of $28,934 and $25,073:

 

 

 

 

 

 

 

Mortgage-backed securities (including securities pledged of $847 and $3,864)

 

19,810

 

 

18,063

 

 

Investment securities (including securities pledged of $2,308 and $3,481)

 

8,530

 

 

6,915

 

 

Total available-for-sale securities

 

28,340

 

 

24,978

 

 

Loans held for sale

 

19,327

 

 

44,970

 

 

Loans held in portfolio

 

214,994

 

 

224,960

 

 

Allowance for loan and lease losses

 

(1,560

)

 

(1,630

)

 

Loans held in portfolio, net

 

213,434

 

 

223,330

 

 

Investment in Federal Home Loan Banks

 

1,596

 

 

2,705

 

 

Mortgage servicing rights

 

7,231

 

 

6,193

 

 

Goodwill

 

9,056

 

 

9,050

 

 

Other assets

 

20,267

 

 

19,937

 

 

Total assets

 

$

312,219

 

 

$

346,288

 

 

Liabilities

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

$

33,557

 

 

$

33,386

 

 

Interest-bearing deposits

 

167,823

 

 

180,570

 

 

Total deposits

 

201,380

 

 

213,956

 

 

Federal funds purchased and commercial paper

 

3,390

 

 

4,778

 

 

Securities sold under agreements to repurchase

 

9,357

 

 

11,953

 

 

Advances from Federal Home Loan Banks

 

21,412

 

 

44,297

 

 

Other borrowings

 

40,313

 

 

32,852

 

 

Other liabilities

 

9,212

 

 

9,035

 

 

Minority interests

 

2,945

 

 

2,448

 

 

Total liabilities

 

288,009

 

 

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, 875,722,387 and 944,478,961 shares issued and outstanding

 

 

 

 

 

Capital surplus – common stock

 

2,715

 

 

5,825

 

 

Accumulated other comprehensive loss

 

(568

)

 

(287

)

 

Retained earnings

 

21,571

 

 

20,939

 

 

Total stockholders’ equity

 

24,210

 

 

26,969

 

 

Total liabilities and stockholders’ equity

 

$

312,219

 

 

$

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 adjustment

 

 

 

 

 

 

 

 

 

 

 

(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

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,614

 

 

1,614

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

(303

)

 

 

 

 

(303

)

Net unrealized gain from cash flow hedging instruments

 

 

 

 

 

 

 

 

 

 

 

22

 

 

 

 

 

22

 

Total comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,333

 

Cash dividends declared on common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(961

)

 

(961

)

Cash dividends declared on preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(15

)

 

(15

)

Common stock repurchased and retired

 

 

(74.9

)

 

 

 

 

 

(3,297

)

 

 

 

 

 

 

 

(3,297

)

Common stock issued

 

 

6.1

 

 

 

 

 

 

187

 

 

 

 

 

 

 

 

187

 

BALANCE, June 30, 2007

 

 

875.7

 

 

 

$

492

 

 

 

$

2,715

 

 

 

$

(568

)

 

 

$

21,571

 

 

$

24,210

 

 

See Notes to Consolidated Financial Statements.

3




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

 

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

 

 

(in millions)

 

Cash Flows from Operating Activities

 

 

 

 

 

Net income

 

$

1,614

 

$

1,752

 

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

 

 

 

 

 

Provision for loan and lease losses

 

606

 

306

 

Gain from home mortgage loans

 

(214

)

(350

)

Gain from credit card loans

 

(259

)

(121

)

(Gain) loss from available-for-sale securities

 

(41

)

1

 

Depreciation and amortization

 

306

 

445

 

Change in fair value of MSR

 

333

 

180

 

Stock dividends from Federal Home Loan Banks

 

(55

)

(86

)

Capitalized interest income from option adjustable-rate mortgages

 

(706

)

(439

)

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

 

(54,637

)

(60,728

)

Proceeds from sales of loans originated and held for sale

 

57,928

 

68,121

 

Net (increase) decrease in trading assets

 

(825

)

4,843

 

Increase in other assets

 

(382

)

(1,780

)

Increase in other liabilities

 

87

 

835

 

Net cash provided by operating activities

 

3,755

 

12,979

 

Cash Flows from Investing Activities

 

 

 

 

 

Purchases of available-for-sale securities

 

(8,981

)

(9,990

)

Proceeds from sales of available-for-sale securities

 

4,370

 

4,697

 

Principal payments and maturities on available-for-sale securities

 

1,227

 

1,514

 

Purchases of Federal Home Loan Bank stock

 

(24

)

 

Redemption of Federal Home Loan Bank stock

 

1,188

 

840

 

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

 

6,732

 

(14,780

)

Proceeds from sales of loans

 

22,486

 

1,988

 

Proceeds from sales of foreclosed assets

 

354

 

237

 

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

 

476

 

(1,975

)

Purchases of premises and equipment, net

 

(123

)

(183

)

Net cash provided (used) by investing activities

 

27,705

 

(17,652

)

 

(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,

 

 

 

2007

 

2006

 

 

 

(in millions)

 

Cash Flows from Financing Activities

 

 

 

 

 

(Decrease) increase in deposits

 

$

(12,576

)

$

11,391

 

Increase in short-term borrowings

 

1,907

 

3,838

 

Proceeds from long-term borrowings

 

13,054

 

15,003

 

Repayments of long-term borrowings

 

(10,120

)

(10,803

)

Proceeds from advances from Federal Home Loan Banks

 

20,016

 

14,909

 

Repayments of advances from Federal Home Loan Banks

 

(42,904

)

(28,368

)

Proceeds from issuance of preferred securities by subsidiary

 

497

 

1,959

 

Cash dividends paid on preferred and common stock

 

(976

)

(985

)

Repurchase of common stock

 

(3,297

)

(2,108

)

Other

 

158

 

298

 

Net cash (used) provided by financing activities

 

(34,241

)

5,134

 

(Decrease) increase in cash and cash equivalents

 

(2,781

)

461

 

Cash and cash equivalents, beginning of period

 

6,948

 

6,214

 

Cash and cash equivalents, end of period

 

$

4,167

 

$

6,675

 

Noncash Activities

 

 

 

 

 

Loans exchanged for mortgage-backed securities

 

$

472

 

$

909

 

Real estate acquired through foreclosure

 

627

 

293

 

Loans transferred from held for sale to held in portfolio

 

2,624

 

3,000

 

Loans transferred from held in portfolio to held for sale

 

2,908

 

1,826

 

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

 

 

858

 

Cash Paid During the Period For

 

 

 

 

 

Interest on deposits

 

$

3,556

 

$

2,493

 

Interest on borrowings

 

2,404

 

2,655

 

Income taxes

 

1,146

 

557

 

 

See Notes to Consolidated Financial Statements.

5




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

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.

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 certain 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. 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 Note 8 to the Consolidated Financial Statements – “Operating Segments,” and are presented in the aggregate as discontinued operations.

6




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

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
June 30,

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

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)

 

 

$

66

 

 

 

$

190

 

 

$

214

 

$

356

 

Revaluation gain from derivatives economically hedging loans held for sale

 

 

126

 

 

 

61

 

 

72

 

104

 

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

 

 

192

 

 

 

251

 

 

286

 

460

 

Servicing activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

Home mortgage loan servicing revenue (2)

 

 

526

 

 

 

586

 

 

1,041

 

1,159

 

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

 

 

(401

)

 

 

(460

)

 

(757

)

(869

)

Change in MSR fair value due to valuation inputs or assumptions

 

 

530

 

 

 

435

 

 

434

 

849

 

Revaluation loss from derivatives economically hedging MSR

 

 

(547

)

 

 

(433

)

 

(579

)

(956

)

Adjustment to MSR fair value for MSR sale

 

 

 

 

 

(157

)

 

 

(157

)

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

 

 

108

 

 

 

(29

)

 

139

 

26

 

Total revenue from sales and servicing of home mortgage loans

 

 

$

300

 

 

 

$

222

 

 

$

425

 

$

486

 


(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).

7




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

Changes in the balance of MSR were as follows:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in millions)

 

Balance, beginning of period

 

 

$

6,507

 

 

 

$

8,736

 

 

$

6,193

 

$

8,041

 

Home loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

Additions

 

 

592

 

 

 

607

 

 

1,351

 

1,239

 

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

 

 

(401

)

 

 

(460

)

 

(757

)

(869

)

Change in MSR fair value due to valuation inputs or assumptions

 

 

530

 

 

 

435

 

 

434

 

849

 

Adjustment to MSR fair value for MSR sale (1)

 

 

 

 

 

(157

)

 

 

(157

)

Fair value basis adjustment (2)

 

 

 

 

 

 

 

 

57

 

Net change in commercial real estate MSR

 

 

3

 

 

 

1

 

 

10

 

2

 

Balance, end of period

 

 

$

7,231

 

 

 

$

9,162

 

 

$

7,231

 

$

9,162

 


(1)              Reflects the sale of $2.53 billion of MSR in July 2006.

(2)              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.

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

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in millions)

 

Balance, beginning of period

 

$

467,782

 

$

569,501

 

$

444,696

 

$

563,208

 

Home loans:

 

 

 

 

 

 

 

 

 

Additions

 

29,949

 

30,949

 

74,500

 

65,974

 

Loan payments and other

 

(24,213

)

(30,377

)

(46,682

)

(59,440

)

Net change in commercial real estate loans

 

1,349

 

279

 

2,353

 

610

 

Balance, end of period

 

$

474,867

 

$

570,352

 

$

474,867

 

$

570,352

 

 

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 settlement. As a result of the implementation of FIN 48, the Company recognized a $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. At June 30, 2007, the total amount of unrecognized tax benefits was $1.34 billion, of which $743 million would favorably affect the effective tax rate if recognized.

8




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

The Company records interest expense and penalties related to unrecognized tax benefits as a component of income tax expense. As of January 1, 2007 and June 30, 2007, the Company had accrued $105 million and $136 million for the potential payments of interest, and $47 million for the potential payments of 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 June 30, 2007, accrued interest income totaled $295 million and $402 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 by a subsidiary of the former Providian Financial Corporation. The range of the possible settlement is estimated to be $21 million to $32 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 $179 million as of June 30, 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

9




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

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 June 30, 2007, the Company was authorized to issue 1.6 billion shares with no par value. Share activity is as follows:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

    2007    

 

    2006    

 

  2007  

 

  2006  

 

 

 

(in millions)

 

Shares outstanding, beginning of period

 

 

888.1

 

 

 

958.8

 

 

 

944.5

 

 

 

993.9

 

 

Issued:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation plans

 

 

1.0

 

 

 

4.0

 

 

 

5.8

 

 

 

11.2

 

 

Employee stock purchase plan

 

 

0.1

 

 

 

0.1

 

 

 

0.3

 

 

 

0.3

 

 

Subordinated note conversion

 

 

 

 

 

 

 

 

 

 

 

4.5

 

 

Total shares issued

 

 

1.1

 

 

 

4.1

 

 

 

6.1

 

 

 

16.0

 

 

Repurchased and retired (1)

 

 

(13.5

)

 

 

 

 

 

(74.9

)

 

 

(47.0

)

 

Shares outstanding, end of period

 

 

875.7

 

 

 

962.9

 

 

 

875.7

 

 

 

962.9

 

 


(1)                  Includes shares repurchased through accelerated share repurchase programs of 13.5 million and zero during the three months ended June 30, 2007 and 2006 and 73.0 million and 34.0 million during the six months ended June 30, 2007 and 2006.

Share Repurchases

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

On January 3, 2007, the Company repurchased 59.5 million shares of its common stock from a broker-dealer counterparty under an ASR program at an initial cost of $2.72 billion (the “January ASR”). The repurchased shares were retired by the Company during the first quarter of 2007. In connection with the January ASR, the counterparty was expected to purchase an equivalent number of shares in the open market over time. At the end of the program, the Company or the counterparty was required to settle the price adjustment to the other party based on the volume weighted average price of the Company’s shares traded during the purchase period.

10




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

On May 23, 2007, the Company and counterparty terminated the January ASR and simultaneously entered into two new ASR programs covering 34.75 million shares in the aggregate (the “May ASRs”). In connection with and pursuant to the termination of the January ASR and execution of the May ASRs, the Company and the counterparty did the following:

(i)              They settled the January ASR price adjustment with respect to the shares deemed purchased by the counterparty on the open market prior to termination. This settlement required that the counterparty transfer 2.55 million shares of Washington Mutual, Inc. common stock to the Company.

(ii)          They settled the January ASR with respect to the shares deemed not yet purchased by the counterparty on the open market prior to termination. This settlement required that the Company transfer 23.8 million shares of its common stock to the counterparty and that the counterparty pay $1.08 billion to the Company.

(iii)      They entered into the May ASRs.

The foregoing obligations in connection with the termination and settlement of the January ASR were setoff against the share delivery and payment obligations under the May ASRs. Accordingly, on a net settlement basis, the Company received 2.55 million shares of its common stock in settlement of the January ASR and repurchased and received an additional net 10.95 million shares of its common stock from the counterparty at a net cost of $500 million, which was recorded as a reduction of capital surplus.

The forward contracts associated with the May ASRs had no effect on average diluted common shares outstanding for the three and six months ended June 30, 2007, since a hypothetical settlement of the forward contract within each program on June 30 would have been accretive to diluted earnings per share.

The May ASRs were settled in July, and resulted in the Company’s receipt of an additional 1.91 million shares of its common stock from the counterparty.

In addition, during the six months ended June 30, 2007, the Company purchased 1.85 million of its shares in open market repurchases.

Note 7:  Earnings Per Common Share

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

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(in thousands)

 

Weighted average common shares:

 

 

 

 

 

 

 

 

 

Basic weighted average number of common shares outstanding

 

868,968

 

947,023

 

871,876

 

960,245

 

Dilutive effect of potential common shares from:

 

 

 

 

 

 

 

 

 

Awards granted under equity incentive programs

 

12,946

 

15,275

 

13,026

 

16,009

 

Common stock warrants

 

9,999

 

11,071

 

10,225

 

10,754

 

Convertible debt

 

1,177

 

1,179

 

1,177

 

1,922

 

Accelerated share repurchase program

 

 

956

 

 

478

 

Diluted weighted average number of common shares outstanding

 

893,090

 

975,504

 

896,304

 

989,408

 

 

11




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

For the three and six months ended June 30, 2007, options to purchase an additional 19.1 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, 2006, options to purchase an additional 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.

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 June 30, 2007, the conditions for releasing the shares from escrow were not satisfied and therefore none of the shares in the escrow were included in the above computations.

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 Company’s operating segments are defined by the products and services they offer. 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.

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 and six months ended June 30, 2006 are reported within the Retail Banking Group’s results as discontinued operations.

12




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

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.

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.

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 real estate secured 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 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

13




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

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:

·        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 facilities, legal, accounting and finance functions, human resources and technology services;

·        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 the risk profile is centrally managed. Certain basis and other residual risk remains in the operating segments;

·        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;

14




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

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

·        the accounting for inter-segment transactions, 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 initiated through retail banking stores are transferred to held for sale. The results of all inter-segment activities are eliminated as reconciling adjustments that are necessary to conform the presentation of management accounting policies to the accounting principles used in the Company’s consolidated financial statements.

Financial highlights by operating segment were as follows:

 

 

Three Months Ended June 30, 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

 

$

1,283

 

 

$

660

 

 

 

$

195

 

 

$

215

 

 

$

2

 

 

 

$

(459

)

 

$

138

(3)

$

2,034

 

Provision for loan and lease losses

 

91

 

 

523

 

 

 

2

 

 

101

 

 

(51

)

 

 

(294

)

 

 

372

 

Noninterest income (expense)

 

819

 

 

393

 

 

 

62

 

 

391

 

 

42

 

 

 

165

 

 

(114

) (4)

1,758

 

Inter-segment revenue (expense)

 

21

 

 

(5

)

 

 

 

 

(16

)

 

 

 

 

 

 

 

 

Noninterest expense

 

1,139

 

 

300

 

 

 

74

 

 

548

 

 

77

 

 

 

 

 

 

2,138

 

Minority interest expense

 

 

 

 

 

 

 

 

 

 

42

 

 

 

 

 

 

42

 

Income (loss) before income taxes

 

893

 

 

225

 

 

 

181

 

 

(59

)

 

(24

)

 

 

 

 

24

 

1,240

 

Income taxes (benefit)

 

335

 

 

84

 

 

 

68

 

 

(22

)

 

(38

)

 

 

 

 

(17

) (5)

410

 

Net income (loss)

 

$

558

 

 

$

141

 

 

 

$

113

 

 

$

(37

)

 

$

14

 

 

 

$

 

 

$

41

 

$

830

 

Performance and other data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average loans

 

$

149,716

 

 

$

24,234

 

 

 

$

38,789

 

 

$

43,312

 

 

$

1,367

 

 

 

$

(13,888

)

 

$

(1,301

) (6)

$

242,229

 

Average assets

 

159,518

 

 

26,762

 

 

 

41,181

 

 

60,330

 

 

41,801

 

 

 

(12,287

)

 

(1,301

) (6)

316,004

 

Average deposits

 

145,252

 

 

n/a

 

 

 

6,160

 

 

17,506

 

 

37,847

 

 

 

n/a

 

 

n/a

 

206,765

 


(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)
(UNAUDITED)

 

 

Three Months Ended June 30, 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)

 

$

1,323

 

 

$

615

 

 

 

$

166

 

 

$

290

 

 

$

(60

)

 

 

$

(405

)

 

$

131

(3)

$

2,060

 

Provision for loan and lease losses

 

13

 

 

417

 

 

 

(10

)

 

38

 

 

(17

)

 

 

(217

)

 

 

224

 

Noninterest income (expense)

 

732

 

 

389

 

 

 

17

 

 

461

 

 

(88

)

 

 

188

 

 

(121

) (4)

1,578

 

Inter-segment revenue (expense)

 

16

 

 

(1

)

 

 

 

 

(15

)

 

 

 

 

 

 

 

 

Noninterest expense

 

1,109

 

 

293

 

 

 

57

 

 

617

 

 

153

 

 

 

 

 

 

2,229

 

Minority interest expense

 

 

 

 

 

 

 

 

 

 

37

 

 

 

 

 

 

37

 

Income (loss) from continuing operations before income taxes

 

949

 

 

293

 

 

 

136

 

 

81

 

 

(321

)

 

 

 

 

10

 

1,148

 

Income taxes (benefit)

 

363

 

 

112

 

 

 

52

 

 

31

 

 

(129

)

 

 

 

 

(40

) (5)

389

 

Income (loss) from continuing operations

 

586

 

 

181

 

 

 

84

 

 

50

 

 

(192

)

 

 

 

 

50

 

759

 

Income from discontinued operations, net of taxes

 

8

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8

 

Net income (loss)

 

$

594

 

 

$

181

 

 

 

$

84

 

 

$

50

 

 

$

(192

)

 

 

$

 

 

$

50

 

$

767

 

Performance and other data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average loans

 

$

182,891

 

 

$

20,474

 

 

 

$

31,505

 

 

$

43,988

 

 

$

1,178

 

 

 

$

(11,565

)

 

$

(1,601

) (6)

$

266,870

 

Average assets

 

193,246

 

 

23,044

 

 

 

33,709

 

 

70,958

 

 

39,061

 

 

 

(9,753

)

 

(1,601

) (6)

348,664

 

Average deposits

 

138,803

 

 

n/a

 

 

 

2,242

 

 

20,124

 

 

39,083

 

 

 

n/a

 

 

n/a

 

200,252

 


(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)
(UNAUDITED)

 

 

Six Months Ended June 30, 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)

 

$

2,558

 

 

$

1,314

 

 

 

$

395

 

 

$

460

 

 

$

(13

)

 

 

$

(874

)

 

$

275

(3)

$

4,115

 

Provision for loan and lease
losses

 

153

 

 

912

 

 

 

(7

)

 

150

 

 

(25

)

 

 

(577

)

 

 

606

 

Noninterest income (expense)

 

1,571

 

 

867

 

 

 

76

 

 

553

 

 

123

 

 

 

297

 

 

(188

) (4)

3,299

 

Inter-segment revenue
(expense)

 

43

 

 

(9

)

 

 

 

 

(34

)

 

 

 

 

 

 

 

 

Noninterest expense

 

2,215

 

 

626

 

 

 

148

 

 

1,069

 

 

186

 

 

 

 

 

 

4,244

 

Minority interest expense

 

 

 

 

 

 

 

 

 

 

85

 

 

 

 

 

 

85

 

Income (loss) before income taxes

 

1,804

 

 

634

 

 

 

330

 

 

(240

)

 

(136

)

 

 

 

 

87

 

2,479

 

Income taxes (benefit)

 

677

 

 

238

 

 

 

124

 

 

(90

)

 

(109

)

 

 

 

 

25

(5)

865

 

Net income (loss)

 

$

1,127

 

 

$

396

 

 

 

$

206

 

 

$

(150

)

 

$

(27

)

 

 

$

 

 

$

62

 

$

1,614

 

Performance and other data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average loans

 

$

152,445

 

 

$

23,921

 

 

 

$

38,715

 

 

$

48,255

 

 

$

1,356

 

 

 

$

(13,201

)

 

$

(1,389

) (6)

$

250,102

 

Average assets

 

162,267

 

 

26,403

 

 

 

41,092

 

 

65,824

 

 

41,341

 

 

 

(11,627

)

 

(1,389

) (6)

323,911

 

Average deposits

 

144,644

 

 

n/a

 

 

 

4,968

 

 

17,139

 

 

42,002

 

 

 

n/a

 

 

n/a

 

208,753

 


(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.

17




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

 

 

 

Six Months Ended June 30, 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)

 

$

2,670

 

 

$

1,232

 

 

 

$

329

 

 

$

628

 

 

$

(104

)

 

 

$

(837

)

 

$

258

(3)

$

4,176

 

Provision for loan and lease
losses

 

67

 

 

747

 

 

 

(10

)

 

57

 

 

(113

)

 

 

(442

)

 

 

306

 

Noninterest income (expense)

 

1,401

 

 

734

 

 

 

29

 

 

862

 

 

63

 

 

 

395

 

 

(268

) (4)

3,216

 

Inter-segment revenue
(expense)

 

30

 

 

(2

)

 

 

 

 

(28

)

 

 

 

 

 

 

 

 

Noninterest expense

 

2,197

 

 

590

 

 

 

125

 

 

1,239

 

 

216

 

 

 

 

 

 

4,367

 

Minority interest expense

 

 

 

 

 

 

 

 

 

 

37

 

 

 

 

 

 

37

 

Income (loss) from continuing operations before income
taxes

 

1,837

 

 

627

 

 

 

243

 

 

166

 

 

(181

)

 

 

 

 

(10

)

2,682

 

Income taxes (benefit)

 

702

 

 

240

 

 

 

93

 

 

63

 

 

(96

)

 

 

 

 

(55

) (5)

947

 

Income (loss) from continuing operations

 

1,135

 

 

387

 

 

 

150

 

 

103

 

 

(85

)

 

 

 

 

45

 

1,735

 

Income from discontinued operations, net of taxes

 

17

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17

 

Net income (loss)

 

$

1,152

 

 

$

387

 

 

 

$

150

 

 

$

103

 

 

$

(85

)

 

 

$

 

 

$

45

 

$

1,752

 

Performance and other data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average loans

 

$

178,396

 

 

$

20,281

 

 

 

$

31,260

 

 

$

46,934

 

 

$

1,160

 

 

 

$

(11,835

)

 

$

(1,586

) (6)

$

264,610

 

Average assets

 

188,721

 

 

22,905

 

 

 

33,522

 

 

74,541

 

 

38,057

 

 

 

(9,985

)

 

(1,586

) (6)

346,175

 

Average deposits

 

138,930

 

 

n/a

 

 

 

2,250

 

 

18,339

 

 

36,149

 

 

 

n/a

 

 

n/a

 

195,668

 


(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.

18




MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Discontinued Operations

On December 31, 2006, Washington Mutual, Inc. (“Washington Mutual” or the “Company”) exited the retail mutual fund management business and completed the sale of WM Advisors, Inc. 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 Note 8 to the Consolidated Financial Statements – “Operating Segments,” and are presented in the aggregate as discontinued operations.

Cautionary Statements

The Company’s Form 10-Q and other documents that it files with the Securities and Exchange Commission (“SEC”) contain forward-looking statements. In addition, the Company’s senior management may make forward-looking statements orally to analysts, investors, the media and others. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could” or “may.”

Forward-looking statements provide management’s current expectations or predictions of future conditions, events or results. They may include projections of the Company’s revenues, income, earnings per share, capital expenditures, dividends, capital structure or other financial items, descriptions of management’s plans or objectives for future operations, products or services, or descriptions of assumptions underlying or relating to the foregoing. They are not guarantees of future performance. By their nature, forward-looking statements are subject to risks and uncertainties. These statements speak only as of the date made and management does not undertake to update them to reflect changes or events that occur after that date. There are a number of significant factors which could cause actual conditions, events or results to differ materially from those described in the forward-looking statements, many of which are beyond management’s control or its ability to accurately forecast or predict. Significant among the factors are the following which are described in greater detail in “Business – Factors That May Affect Future Results” in the Company’s 2006 Annual Report on Form 10-K:

·        Volatile interest rates and their impact on the mortgage banking business;

·        Credit risk;

·        Operational risk;

·        Risks related to credit card operations;

·        Changes in the regulation of financial services companies, housing government-sponsored enterprises and credit card lenders;

·        Competition from banking and nonbanking companies;

·        General business, economic and market conditions; and

·        Reputational risk.

19




Another significant factor is the following:

Liquidity risk.

Liquidity is essential to the Company’s business. The Company’s liquidity may be affected by an inability to access the capital markets or by unforeseen demands on cash. This situation may arise due to circumstances beyond the Company’s control, such as a general market disruption. During the first half of the year and continuing into the third quarter of 2007, there has been significant volatility in the subprime secondary mortgage market which has spread into markets for all other nonconforming residential mortgages. Since the latter part of July 2007, liquidity in the secondary market for nonconforming residential mortgage loans and securities backed by such loans has diminished significantly. While these market conditions persist, the Company’s ability to raise liquidity through the sale of mortgage loans in the secondary market will be adversely affected. The Company cannot predict with any degree of certainty how long these market conditions may continue or whether liquidity for nonconforming residential mortgages will improve, nor can it anticipate the impact such market conditions will have on loan origination volumes and gain on sale results during the remainder of the year. For further discussion of liquidity, see Management’s Discussion and Analysis – “Liquidity Risk and Capital Management.”

Each of the factors can significantly impact the Company’s businesses, operations, activities, condition and results in significant ways that are not described in the foregoing discussion and which are beyond the Company’s ability to anticipate or control, and could cause actual results to differ materially from the outcomes described in the forward-looking statements.

Controls and Procedures

Disclosure Controls and Procedures

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or furnishes under the Securities Exchange Act of 1934.

Management reviews and evaluates the design and effectiveness of the Company’s disclosure controls and procedures on an ongoing basis, which may result in the discovery of deficiencies, and improves its controls and procedures over time, correcting any deficiencies, as needed, that may have been discovered.

Changes in Internal Control Over Financial Reporting

Management reviews and evaluates the design and effectiveness of the Company’s internal control over financial reporting on an ongoing basis, which may result in the discovery of deficiencies, some of which may be significant. Management changes its internal control over financial reporting as needed to maintain its effectiveness, correcting any deficiencies, as needed, in order to ensure the continued effectiveness of the Company’s internal control over financial reporting. There have not been any changes in the Company’s internal control over financial reporting during the second quarter of 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. For management’s assessment of the Company’s internal control over financial reporting, refer to the Company’s 2006 Annual Report on Form 10-K, “Management’s Report on Internal Control Over Financial Reporting.”

20




Overview

Net income in the second quarter of 2007 was $830 million, an increase of 8% from $767 million in the second quarter of 2006. Diluted earnings per common share increased by 16% between those respective periods, rising to $0.92 in the second quarter of 2007, compared with $0.79 in the same period of the prior year. The increase in diluted earnings per share outpaced the growth in net income due to the effect of common share repurchase activity. Since the second quarter of 2006, the Company has repurchased over 95 million common shares, including approximately 75 million shares during the first six months of 2007.

Net interest income was $2.03 billion in the second quarter of 2007, compared with $2.06 billion in the same quarter of 2006. The decline was due to a 10.7% decrease in average interest-earning assets that included the $17.5 billion sale of lower-yielding, medium-term adjustable-rate home loans in the first quarter of 2007, and a decline in the balance of Option ARMs. The decline in interest-earning assets was partially offset by the expansion of the net interest margin. The net interest margin in the second quarter of 2007 was 2.90%, compared with 2.65% in the second quarter of 2006. The increase is largely due to the upward repricing of the Company’s adjustable-rate mortgage loan portfolio, the aforementioned sale of lower-yielding home loans and a favorable change in the composition of funding sources. With the decline in interest-earning assets between the second quarter of 2006 and the second quarter of 2007, the Company paid off a substantial amount of its higher-cost borrowings, while growing its lower-cost retail deposit base. Additionally, the impact of noninterest-bearing sources on the net interest margin increased from 47 basis points in the second quarter of 2006 to 53 basis points in the most recent quarter, as the percentage of noninterest-bearing sources that fund the interest-earning asset base increased from 11.24% to 12.02% between those periods.

Noninterest income totaled $1.76 billion in the second quarter of 2007, compared with $1.58 billion in the second quarter of 2006. The increase was primarily due to growth in depositor and other retail banking fees and higher revenue from sales and servicing of home mortgage loans. Depositor and other retail banking fees increased by $79 million, or 12%, from the second quarter of 2006, reflecting the continued strong customer response to the Company’s new free checking product and higher transaction fees. The number of noninterest-bearing checking accounts at June 30, 2007 totaled approximately 10.4 million, an increase of over 1.4 million accounts from a year ago.

Revenue from sales and servicing of home mortgage loans totaled $300 million in the most recent quarter, compared with $222 million in the second quarter of 2006, reflecting improved MSR results, partially offset by a decline in gain from home mortgage loans. Home mortgage loan servicing revenue, net of MSR valuation changes and derivative risk management instruments, totaled $108 million in the most recent quarter, compared with a loss of $29 million in the same quarter of the prior year. The second quarter 2006 MSR results included a $157 million downward adjustment in the MSR fair value associated with the sale of $2.53 billion of mortgage servicing rights in July 2006. Gain from home mortgage loans and originated mortgage-backed securities, net of hedging and risk management instruments, declined from $251 million for the quarter ending June 30, 2006 to $192 million in the second quarter of 2007, reflecting the slowdown in the national housing market. Continued weak conditions in the secondary market for subprime mortgage loans, although somewhat improved from the first quarter of 2007, resulted in losses, net of risk management instruments, of $38 million and $202 million for the three and six months ending June 30, 2007 from sales of subprime mortgage loans and adjustments to reflect changes in fair values of loans held for sale.

The weakness in the subprime mortgage market also reduced the valuation of the Company’s trading assets retained from subprime mortgage loan securitizations. Rapidly rising levels of delinquencies on the underlying subprime loans that the Company had previously securitized and unfavorable trends in housing price expectations resulted in higher expected credit losses. These factors contributed to downward

21




adjustments in the fair value of subprime residuals of $93 million and $181 million for the three and six months ended June 30, 2007. At June 30, 2007, the fair value of subprime residuals was $79 million.

The Company recorded a provision for loan and lease losses of $372 million in the second quarter of 2007, a 66% increase from the $224 million provision that was recorded in the same quarter of last year. The increase in the provision from the second quarter of 2006 is primarily the result of significant deterioration in U.S. housing market conditions, tempered by a decline in the size of the loan portfolio. Lower volumes of home sales transactions, longer marketing periods, growing inventories of unsold homes and increased foreclosure rates continued to exert downward pressure on home prices in many parts of the country during the most recent quarter. These conditions resulted in an increase in the ratio of nonperforming assets as a percentage of total assets from 0.62% at June 30, 2006 to 1.29% at  June 30, 2007. Additionally, loss severity rates, particularly for the subprime mortgage channel and home equity loans and lines of credit, have increased significantly since the second quarter of 2006. Reflecting the additional credit risk within the loan portfolio, the allowance for loan and lease losses as a percentage of loans held in portfolio increased from 0.68% at June 30, 2006 to 0.73% at June 30, 2007. With housing market conditions expected to deteriorate further in the second half of 2007, the Company anticipates that loss severity rates in the subprime mortgage channel and home equity loans and lines of credit portfolios will continue to increase.

Critical Accounting Estimates

The preparation of financial statements in accordance with the accounting principles generally accepted in the United States of America (“GAAP”) requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the financial statements. Various elements of the Company’s accounting policies, by their nature, involve the application of highly sensitive and judgmental estimates and assumptions. Some of these policies and estimates relate to matters that are highly complex and contain inherent uncertainties. It is possible that, in some instances, different estimates and assumptions could reasonably have been made and used by management, instead of those the Company applied, which might have produced different results that could have had a material effect on the financial statements.

The Company has identified three accounting estimates that, due to the judgments and assumptions inherent in those estimates, and the potential sensitivity of its financial statements to those judgments and assumptions, are critical to an understanding of its financial statements. These estimates are:  the fair value of certain financial instruments and other assets; the determination of whether a derivative qualifies for hedge accounting; and the allowance for loan and lease losses and contingent credit risk liabilities.

Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of the Company’s Board of Directors. The Company believes that the judgments, estimates and assumptions used in the preparation of its financial statements are appropriate given the facts and circumstances as of June 30, 2007. These judgments, estimates and assumptions are described in greater detail in the Company’s 2006 Annual Report on Form 10-K in the “Critical Accounting Estimates” section of Management’s Discussion and Analysis and in Note 1 to the Consolidated Financial Statements – “Summary of Significant Accounting Policies.”

One important change to the Company’s critical accounting estimates since December 31, 2006, involves the valuation methodology used to estimate the fair value of its MSR asset, as discussed below:

Fair Value of Certain Financial Instruments and Other Assets

Mortgage Servicing Rights

In June 2007, the Company implemented a model that is based on an option-adjusted spread (“OAS”) valuation methodology to estimate the fair value of substantially all of its MSR asset. The model projects

22




cash flows over multiple interest rate scenarios and discounts these cash flows using risk-adjusted discount rates to arrive at an estimate of the fair value of the MSR asset. Models used to value MSR assets, including those employing the OAS valuation methodology, are highly sensitive to changes in certain assumptions. Different expected prepayment speeds, in particular, can result in substantial changes in the estimated fair value of MSR. If actual prepayment experience differs materially from the expected prepayment speeds used in the Company’s model, this difference may result in a material change in MSR fair value. The reasonableness of management’s assumptions about these factors is evaluated through quarterly independent broker surveys. Independent appraisals of the fair value of the mortgage servicing rights are obtained at least quarterly, and are used by management to evaluate the reasonableness of the fair value estimate. Changes in MSR value are reported in the Consolidated Statements of Income under the noninterest income caption “Revenue from sales and servicing of home mortgage loans.”

Recently Issued Accounting Standards Not Yet Adopted

Refer to Note 1 to the Consolidated Financial Statements – “Summary of Significant Accounting Policies.”

23




Summary Financial Data

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(dollars in millions, except
per share amounts)

 

Profitability

 

 

 

 

 

 

 

 

 

Net interest income

 

$

2,034

 

$

2,060

 

$

4,115

 

$

4,176

 

Net interest margin

 

2.90

%

2.65

%

2.85

%

2.70

%

Noninterest income

 

$

1,758

 

$

1,578

 

$

3,299

 

$

3,216

 

Noninterest expense

 

2,138

 

2,229

 

4,244

 

4,367

 

Net income

 

830

 

767

 

1,614

 

1,752

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

$

0.95

 

$

0.80

 

$

1.83

 

$

1.81

 

Income from discontinued operations

 

 

0.01

 

 

0.02

 

Net income

 

0.95

 

0.81

 

1.83

 

1.83

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

Income from continuing operations

 

0.92

 

0.78

 

1.78

 

1.75

 

Income from discontinued operations

 

 

0.01

 

 

0.02

 

Net income

 

0.92

 

0.79

 

1.78

 

1.77

 

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

 

868,968

 

947,023

 

871,876

 

960,245

 

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

 

893,090

 

975,504

 

896,304

 

989,408

 

Dividends declared per common share

 

$

0.55

 

$

0.51

 

$

1.09

 

$

1.01

 

Return on average assets

 

1.05

%

0.88

%

1.00

%

1.01

%

Return on average common equity

 

13.74

 

11.82

 

13.36

 

13.28

 

Efficiency ratio (1)(2)

 

56.38

 

61.27

 

57.24

 

59.08

 

Asset Quality (at period end)

 

 

 

 

 

 

 

 

 

Nonaccrual loans (3)

 

$

3,275

 

$

1,830

 

$

3,275

 

$

1,830

 

Foreclosed assets

 

750

 

330

 

750

 

330

 

Total nonperforming assets (3)

 

4,025

 

2,160

 

4,025

 

2,160

 

Nonperforming assets (3)  to total assets

 

1.29

%

0.62

%

1.29

%

0.62

%

Allowance for loan and lease losses

 

$

1,560

 

$

1,663

 

$

1,560

 

$

1,663

 

Allowance as a percentage of loans held in portfolio

 

0.73

%

0.68

%

0.73

%

0.68

%

Credit Performance

 

 

 

 

 

 

 

 

 

Provision for loan and lease losses

 

$

372

 

$

224

 

$

606

 

$

306

 

Net charge-offs

 

271

 

116

 

454

 

221

 

Capital Adequacy (at period end)

 

 

 

 

 

 

 

 

 

Stockholders’ equity to total assets

 

7.75

%

7.45

%

7.75

%

7.45

%

Tangible equity to total tangible assets (4)

 

6.07

 

5.84

 

6.07

 

5.84

 

Total risk-based capital to total risk-weighted assets (5)

 

11.04

 

11.26

 

11.04

 

11.26

 

Tier 1 capital to average total assets (5)

 

6.09

 

6.24

 

6.09

 

6.24

 

Per Common Share Data

 

 

 

 

 

 

 

 

 

Book value per common share (at period end) (6)

 

$

27.27

 

$

27.31

 

$

27.27

 

$

27.31

 

Market prices:

 

 

 

 

 

 

 

 

 

High

 

44.41

 

46.48

 

45.56

 

46.48

 

Low

 

38.87

 

42.53

 

38.87

 

41.89

 

Period end

 

42.64

 

45.58

 

42.64

 

45.58

 

Supplemental Data

 

 

 

 

 

 

 

 

 

Total home loan volume

 

31,035

 

42,851

 

61,239

 

87,041

 

Total loan volume (7)

 

46,030

 

54,895

 

88,908

 

109,941

 


(1)                     Based on continuing operations.

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

(3)                     Excludes nonaccrual loans held for sale.

(4)                     Excludes unrealized net gain/loss on available-for-sale securities and cash flow hedging instruments, goodwill and intangible assets (except MSR) and the impact from the adoption and application of FASB Statement No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans . Minority interests of $2.94 billion for June 30, 2007 and $1.96 billion for June 30, 2006 are included in the numerator.

(5)                     The capital ratios are estimated as if Washington Mutual, Inc. were a bank holding company subject to Federal Reserve Board capital requirements.

(6)                     Excludes six million shares held in escrow.

(7)                     Includes mortgage loans purchased from recognized subprime lenders and mortgage loans originated under the Long Beach Mortgage name of $2.45 billion and $8.20 billion for the three months ended June 30, 2007 and 2006, and $5.93 billion and $15.29 billion for the six months ended June 30, 2007 and 2006.

24




Earnings Performance from Continuing Operations

Average balances, together with the total dollar amounts of interest income and expense related to such balances and the weighted average interest rates, were as follows:

 

 

Three Months Ended June 30,

 

 

 

2007

 

2006

 

 

 

Average
Balance

 

Rate

 

Interest
Income

 

Average
Balance

 

Rate

 

Interest
Income

 

 

 

(dollars in millions)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets (1) :

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold and securities purchased under agreements to resell

 

$

3,964

 

5.39

%

$

53

 

$

4,413

 

4.99

%

$

56

 

Trading assets

 

4,995

 

8.67

 

108

 

8,595

 

7.69

 

165

 

Available-for-sale securities (2) :

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

18,576

 

5.36

 

249

 

21,840

 

5.34

 

292

 

Investment securities

 

7,983

 

5.10

 

102

 

6,215

 

4.91

 

76

 

Loans held for sale

 

26,225

 

6.43

 

421

 

24,536

 

6.42

 

395

 

Loans held in portfolio (3) :

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans secured by real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Home loans (4)(5)

 

90,818

 

6.44

 

1,462

 

125,559

 

5.77

 

1,809

 

Home equity loans and lines of credit (5)

 

54,431

 

7.59

 

1,031

 

52,225

 

7.28

 

949

 

Subprime mortgage channel (6)

 

20,152

 

6.80

 

343

 

19,640

 

6.21

 

305

 

Home construction (7)

 

2,043

 

6.72

 

34

 

2,068

 

6.47

 

33

 

Multi-family

 

29,419

 

6.63

 

488

 

26,291

 

6.23

 

410

 

Other real estate

 

6,843

 

7.03

 

120

 

5,585

 

6.97

 

98

 

Total loans secured by real estate

 

203,706

 

6.83

 

3,478

 

231,368

 

6.23

 

3,604

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit card

 

10,101

 

10.44

 

263

 

8,448

 

11.28

 

238

 

Other

 

254

 

12.44

 

8

 

594

 

9.74

 

14

 

Commercial

 

1,943

 

7.73

 

37

 

1,924

 

6.61

 

31

 

Total loans held in portfolio

 

216,004

 

7.02

 

3,786

 

242,334

 

6.42

 

3,887

 

Other

 

2,089

 

5.47

 

29

 

5,306

 

4.80

 

64

 

Total interest-earning assets

 

279,836

 

6.79

 

4,748

 

313,239

 

6.30

 

4,935

 

Noninterest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

 

6,782

 

 

 

 

 

9,003

 

 

 

 

 

Goodwill

 

9,054

 

 

 

 

 

8,302

 

 

 

 

 

Other assets

 

20,332

 

 

 

 

 

18,120

 

 

 

 

 

Total assets

 

$

316,004

 

 

 

 

 

$

348,664

 

 

 

 

 

 

(This table is continued on the next page.)


(1)                  Nonaccrual assets and related income, if any, are included in their respective categories.

(2)                  The average balance and yield are based on average amortized cost balances.

(3)                  Interest income for loans held in portfolio includes amortization of net deferred loan origination costs of $119 million and $116 million for the three months ended June 30, 2007 and 2006.

(4)                  Capitalized interest recognized in earnings that resulted from negative amortization within the Option ARM portfolio totaled $344 million and $245 million for the three months ended June 30, 2007 and 2006.

(5)                  Excludes home loans and home equity loans and lines of credit in the subprime mortgage channel.

(6)                  Represents mortgage loans purchased from recognized subprime lenders and mortgage loans originated under the Long Beach Mortgage name and held in the investment portfolio.

(7)                  Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale and construction loans made directly to the intended occupant of a single-family residence.

25




(Continued from the previous page.)

 

 

Three Months Ended June 30,

 

 

 

2007

 

2006

 

 

 

Average
Balance

 

Rate

 

Interest
Expense

 

Average
 Balance

 

Rate

 

Interest
Expense

 

 

 

(dollars in millions)

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing checking deposits

 

$

30,373

 

2.51

%

 

$

190

 

 

$

37,603

 

2.61

%

 

$

245

 

 

Savings and money market deposits

 

58,969

 

3.33

 

 

490

 

 

48,095

 

2.82

 

 

339

 

 

Time deposits

 

84,330

 

4.96

 

 

1,043

 

 

79,541

 

4.39

 

 

877

 

 

Total interest-bearing deposits

 

173,672

 

3.98

 

 

1,723

 

 

165,239

 

3.53

 

 

1,461

 

 

Federal funds purchased and commercial paper

 

2,169

 

5.36

 

 

29

 

 

7,767

 

4.97

 

 

97

 

 

Securities sold under agreements to repurchase

 

8,416

 

5.35

 

 

112

 

 

17,923

 

4.97

 

 

225

 

 

Advances from Federal Home Loan Banks

 

22,063

 

5.36

 

 

295

 

 

60,862

 

4.85

 

 

745

 

 

Other

 

39,886

 

5.57

 

 

555

 

 

26,239

 

5.27

 

 

347

 

 

Total interest-bearing liabilities

 

246,206

 

4.42

 

 

2,714

 

 

278,030

 

4.12

 

 

2,875

 

 

Noninterest-bearing sources:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

33,093

 

 

 

 

 

 

 

35,013

 

 

 

 

 

 

 

Other liabilities

 

9,610

 

 

 

 

 

 

 

7,698

 

 

 

 

 

 

 

Minority interests

 

2,659

 

 

 

 

 

 

 

1,965

 

 

 

 

 

 

 

Stockholders’ equity

 

24,436

 

 

 

 

 

 

 

25,958

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

316,004

 

 

 

 

 

 

 

$

348,664

 

 

 

 

 

 

 

Net interest spread and net interest income

 

 

 

2.37

 

 

$

2,034

 

 

 

 

2.18

 

 

$

2,060

 

 

Impact of noninterest-bearing sources

 

 

 

0.53

 

 

 

 

 

 

 

0.47

 

 

 

 

 

Net interest margin

 

 

 

2.90

 

 

 

 

 

 

 

2.65

 

 

 

 

 

 

26




 

 

Six Months Ended June 30,

 

 

 

2007

 

2006

 

 

 

Average
Balance

 

Rate

 

Interest
 Income

 

Average
Balance

 

Rate

 

Interest
Income

 

 

 

(dollars in millions)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-earning assets (1) :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal funds sold and securities purchased under agreements to resell

 

$

3,947

 

5.39

%

 

$

105

 

 

$

4,086

 

4.82

%

 

$

99

 

 

Trading assets

 

5,293

 

8.37

 

 

221

 

 

10,135

 

7.18

 

 

363

 

 

Available-for-sale securities (2) :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage-backed securities

 

18,234

 

5.42

 

 

494

 

 

20,997

 

5.31

 

 

558

 

 

Investment securities

 

7,372

 

5.13

 

 

188

 

 

5,534

 

4.78

 

 

132

 

 

Loans held for sale

 

30,810

 

6.40

 

 

984

 

 

27,164

 

6.30

 

 

856

 

 

Loans held in portfolio (3) :

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans secured by real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home loans (4)(5)

 

94,074

 

6.45

 

 

3,033

 

 

121,661

 

5.68

 

 

3,452

 

 

Home equity loans and lines of credit (5)

 

53,726

 

7.57

 

 

2,020

 

 

51,776

 

7.12

 

 

1,831

 

 

Subprime mortgage channel (6)

 

20,381

 

6.74

 

 

686

 

 

19,803

 

6.08

 

 

602

 

 

Home construction (7)

 

2,052

 

6.63

 

 

68

 

 

2,063

 

6.41

 

 

66

 

 

Multi-family

 

29,621

 

6.60

 

 

977

 

 

26,026

 

6.08

 

 

791

 

 

Other real estate

 

6,803

 

7.03

 

 

238

 

 

5,372

 

6.90

 

 

186

 

 

Total loans secured by real estate

 

206,657

 

6.81

 

 

7,022

 

 

226,701

 

6.12

 

 

6,928

 

 

Consumer:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit card

 

10,500

 

11.03

 

 

574

 

 

8,130

 

11.02

 

 

444

 

 

Other

 

261

 

12.70

 

 

17

 

 

607

 

10.40

 

 

32

 

 

Commercial

 

1,874

 

7.83

 

 

73

 

 

2,008

 

6.39

 

 

64

 

 

Total loans held in portfolio

 

219,292

 

7.03

 

 

7,686

 

 

237,446

 

6.30

 

 

7,468

 

 

Other

 

2,776

 

5.65

 

 

78

 

 

5,161

 

4.50

 

 

116

 

 

Total interest-earning assets

 

287,724

 

6.80

 

 

9,756

 

 

310,523

 

6.19

 

 

9,592

 

 

Noninterest-earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage servicing rights

 

6,545

 

 

 

 

 

 

 

8,634

 

 

 

 

 

 

 

Goodwill

 

9,054

 

 

 

 

 

 

 

8,300

 

 

 

 

 

 

 

Other assets

 

20,588

 

 

 

 

 

 

 

18,718

 

 

 

 

 

 

 

Total assets

 

$

323,911

 

 

 

 

 

 

 

$

346,175

 

 

 

 

 

 

 

 

(This table is continued on the next page.)


(1)                  Nonaccrual assets and related income, if any, are included in their respective categories.

(2)                  The average balance and yield are based on average amortized cost balances.

(3)                  Interest income for loans held in portfolio includes amortization of net deferred loan origination costs of $234 million and $214 million for the six months ended June 30, 2007 and 2006.

(4)                  Capitalized interest recognized in earnings that resulted from negative amortization within the Option ARM portfolio totaled $706 million and $439 million for the six months ended June 30, 2007 and 2006.

(5)                  Excludes home loans and home equity loans and lines of credit in the subprime mortgage channel.

(6)                  Represents mortgage loans purchased from recognized subprime lenders and mortgage loans originated under the Long Beach Mortgage name and held in the investment portfolio.

(7)                  Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale and construction loans made directly to the intended occupant of a single-family residence.

27




(Continued from the previous page.)

 

 

Six Months Ended June 30,

 

 

 

2007

 

2006

 

 

 

Average
Balance

 

Rate

 

Interest
Expense

 

Average
 Balance

 

Rate

 

Interest
Expense

 

 

 

(dollars in millions)

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest-bearing checking deposits

 

$

31,093

 

2.57

%

 

$

397

 

 

$

39,012

 

2.45

%

 

$

473

 

 

Savings and money market deposits

 

56,927

 

3.31

 

 

933

 

 

46,464

 

2.61

 

 

602

 

 

Time deposits

 

87,960

 

4.96

 

 

2,165

 

 

76,379

 

4.22

 

 

1,607

 

 

Total interest-bearing deposits

 

175,980

 

4.00

 

 

3,495

 

 

161,855

 

3.33

 

 

2,682

 

 

Federal funds purchased and commercial paper

 

3,003

 

5.44

 

 

81

 

 

7,616

 

4.72

 

 

179

 

 

Securities sold under agreements to repurchase

 

10,247

 

5.43

 

 

276

 

 

16,608

 

4.74

 

 

396

 

 

Advances from Federal Home Loan Banks

 

29,019

 

5.37

 

 

773

 

 

63,912

 

4.65

 

 

1,491

 

 

Other

 

36,366

 

5.62

 

 

1,016

 

 

26,437

 

5.04

 

 

668

 

 

Total interest-bearing liabilities

 

254,615

 

4.47

 

 

5,641

 

 

276,428

 

3.92

 

 

5,416

 

 

Noninterest-bearing sources:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest-bearing deposits

 

32,773

 

 

 

 

 

 

 

33,813

 

 

 

 

 

 

 

Other liabilities

 

9,547

 

 

 

 

 

 

 

8,284

 

 

 

 

 

 

 

Minority interests

 

2,554

 

 

 

 

 

 

 

1,262

 

 

 

 

 

 

 

Stockholders’ equity

 

24,422

 

 

 

 

 

 

 

26,388

 

 

 

 

 

 

 

Total liabilities and stockholders’ equity

 

$

323,911

 

 

 

 

 

 

 

$

346,175

 

 

 

 

 

 

 

Net interest spread and net interest income

 

 

 

2.33

 

 

$

4,115

 

 

 

 

2.27

 

 

$

4,176

 

 

Impact of noninterest-bearing sources

 

 

 

0.52

 

 

 

 

 

 

 

0.43

 

 

 

 

 

Net interest margin

 

 

 

2.85

 

 

 

 

 

 

 

2.70

 

 

 

 

 

 

28




Net Interest Income

Net interest income decreased 1% for the three and six months ended June 30, 2007 compared with the same periods in 2006 due to a decline in average interest-earnings assets, partially offset by an increase in the net interest margin. The decrease in interest-earning assets was largely due to the $17.5 billion sale of lower-yielding, medium-term adjustable-rate home loans in the first quarter of 2007 and a decrease in the size of the Company’s Option ARM portfolio. Contributing to the increase in the net interest margin was a reduction in higher-cost borrowings such as FHLB advances and repurchase agreements, and an increase in the relative significance of lower-cost retail deposits that are funding the interest-earning asset base. The average balance of FHLB advances declined 64% from $60.86 billion in the second quarter of 2006 to $22.06 billion in the second quarter of 2007. Over the same period, average retail deposits increased 5% to $145.25 billion from $138.80 billion. In the second quarter of 2007, average retail deposits funded 52% of average interest-earning assets, up from 44% of average interest-earning assets in the second quarter of 2006.

Noninterest Income

Noninterest income from continuing operations consisted of the following:

 

 

Three Months Ended
June 30,

 

Percentage

 

Six Months Ended
June 30,

 

Percentage

 

 

 

   2007   

 

   2006   

 

   Change   

 

   2007   

 

   2006   

 

   Change   

 

 

 

(dollars in millions)

 

Revenue from sales and servicing of home mortgage loans

 

 

$

300

 

 

 

$

222

 

 

 

35

%

 

 

$

425

 

 

 

$

486

 

 

 

(13

)%

 

Revenue from sales and servicing of consumer loans

 

 

403

 

 

 

424

 

 

 

(5

)

 

 

846

 

 

 

801

 

 

 

6

 

 

Depositor and other retail banking fees

 

 

720

 

 

 

641

 

 

 

12

 

 

 

1,385

 

 

 

1,219

 

 

 

14

 

 

Credit card fees

 

 

183

 

 

 

152

 

 

 

20

 

 

 

355

 

 

 

291

 

 

 

22

 

 

Securities fees and commissions

 

 

70

 

 

 

56

 

 

 

25

 

 

 

131

 

 

 

108

 

 

 

21

 

 

Insurance income

 

 

29

 

 

 

33

 

 

 

(14

)

 

 

58

 

 

 

66

 

 

 

(12

)

 

Loss on trading assets

 

 

(145

)

 

 

(129

)

 

 

12

 

 

 

(253

)

 

 

(142

)

 

 

79

 

 

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

 

 

7

 

 

 

 

 

 

 

 

 

41

 

 

 

(8

)

 

 

 

 

Other income

 

 

191

 

 

 

179

 

 

 

7

 

 

 

311

 

 

 

395

 

 

 

(22

)

 

Total noninterest income

 

 

$

1,758

 

 

 

$

1,578

 

 

 

11

 

 

 

$

3,299

 

 

 

$

3,216

 

 

 

3

 

 

 

29




Revenue from sales and servicing of home mortgage loans

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,

 

Percentage

 

Six Months Ended
June 30,

 

Percentage

 

 

 

   2007   

 

   2006   

 

Change

 

   2007   

 

   2006   

 

Change

 

 

 

(dollars in millions)

 

Revenue from sales and servicing of home mortgage loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

$

66

 

 

 

$

190

 

 

 

(66

)%

 

 

$

214

 

 

 

$

356

 

 

 

(40

)%

 

Revaluation gain from derivatives economically hedging loans held for sale

 

 

126

 

 

 

61

 

 

 

107

 

 

 

72

 

 

 

104

 

 

 

(31

)

 

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

 

 

192

 

 

 

251

 

 

 

(24

)

 

 

286

 

 

 

460

 

 

 

(38

)

 

Servicing activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Home mortgage loan servicing revenue (2)

 

 

526

 

 

 

586

 

 

 

(10

)

 

 

1,041

 

 

 

1,159

 

 

 

(10

)

 

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

 

 

(401

)

 

 

(460

)

 

 

(13

)

 

 

(757

)

 

 

(869

)

 

 

(13

)

 

Change in MSR fair value due to valuation inputs or assumptions

 

 

530

 

 

 

435

 

 

 

22

 

 

 

434

 

 

 

849

 

 

 

(49

)

 

Revaluation loss from derivatives economically hedging MSR

 

 

(547

)

 

 

(433

)

 

 

26

 

 

 

(579

)

 

 

(956

)

 

 

(39

)

 

Adjustment to MSR fair value for MSR sale

 

 

 

 

 

(157

)

 

 

 

 

 

 

 

 

(157

)

 

 

 

 

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

 

 

108

 

 

 

(29

)

 

 

 

 

 

139

 

 

 

26

 

 

 

456

 

 

Total revenue from sales and servicing of home mortgage loans

 

 

$

300

 

 

 

$

222

 

 

 

35

 

 

 

$

425

 

 

 

$

486

 

 

 

(13

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


(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).

30




The following table presents MSR valuation and the corresponding risk management derivative instruments and securities during the three and six months ended June 30, 2007 and 2006:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

   2007   

 

   2006   

 

   2007   

 

   2006   

 

 

 

(in millions)

 

MSR Valuation and Risk Management:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in MSR fair value due to valuation inputs or assumptions

 

 

$

530

 

 

 

$

435

 

 

 

$

434

 

 

$

849

 

Loss on MSR risk management instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revaluation loss from derivatives

 

 

(547

)

 

 

(433

)

 

 

(579

)

 

(956

)

Revaluation loss from certain trading securities

 

 

(4

)

 

 

(47

)

 

 

 

 

(89

)

Total loss on MSR risk management instruments

 

 

(551

)

 

 

(480

)

 

 

(579

)

 

(1,045

)

Total changes in MSR valuation and risk
management

 

 

$

(21

)

 

 

$

(45

)

 

 

$

(145

)

 

$

(196

)

 

The following table reconciles losses on trading assets that are designated as MSR risk management instruments to losses on trading assets that are reported within noninterest income during the three and six months ended June 30, 2007 and 2006:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

   2007   

 

   2006   

 

   2007   

 

   2006   

 

 

 

(in millions)

 

Losses on trading assets resulting from:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

MSR risk management instruments

 

 

$

(4

)

 

 

$

(47

)

 

 

$

 

 

 

$

(89

)

 

Other

 

 

(141

)

 

 

(82

)

 

 

(253

)

 

 

(53

)

 

Total losses on trading assets

 

 

$

(145

)

 

 

$

(129

)

 

 

$

(253

)

 

 

$

(142

)

 

 

MSR valuation and risk management results were losses of $21 million and $145 million for the three and six months ended June 30, 2007, compared with losses of $45 million and $196 million for the same periods in 2006. The rise in long-term interest rates and a positively-sloped yield curve during the second quarter of 2007 had the effect of improving MSR valuation and risk management performance. Some of the Company’s MSR risk management instruments, such as forward commitments to purchase mortgage-backed securities and interest rate swaps, produce more favorable results when the yield curve has a positive slope. Revaluation loss from certain trading securities used for MSR risk management purposes decreased $43 million and $89 million for the three and six months ended June 30, 2007 compared with the same periods in 2006 due to the decline in the average balances of trading securities used to economically hedge the MSR.

In July 2006, the Company sold $2.53 billion of mortgage servicing rights. In conjunction with this sale, a downward adjustment of $157 million was recorded in the MSR fair value in the second quarter of 2006 to reflect the negotiated price of this transaction. Home mortgage loan servicing revenue decreased $60 million and $118 million for the three and six months ended June 30, 2007 compared with the relevant periods in the prior year due to the decline in the portfolio of mortgage loans serviced for others, which was largely a result of this sale.

The value of the MSR asset is subject to prepayment risk. Future expected net cash flows from servicing a loan in the servicing portfolio will not be realized if the loan pays off earlier than expected. Moreover, since most loans within the servicing portfolio do not impose prepayment fees for early payoff, a corresponding economic benefit will not be received if the loan pays off earlier than expected. The fair value of the MSR is estimated from the present value of the future net cash flows the Company expects to receive from the servicing portfolio. Accordingly, prepayment risk subjects the MSR to potential declines

31




in fair value. During the second quarter of 2007, the Company adopted an option-adjusted spread (“OAS”) valuation methodology for estimating the fair value of substantially all of its MSR asset. This methodology projects MSR cash flows over multiple interest rate scenarios, and discounts those cash flows using risk-adjusted discount rates to arrive at an estimate of the fair value of the MSR asset. The Company believes that the adoption of this methodology will improve the efficiency of its hedging strategy and lower the cost of MSR hedging. As the Company’s OAS model was calibrated to the prior model’s valuation results, the conversion to the new methodology did not result in a fair value adjustment to the Company’s MSR asset upon its implementation.

Gain from home mortgage loans and originated mortgage-backed securities, net of hedging and risk management instruments (net gain on sale), was $192 million and $286 million for the three and six months ended June 30, 2007, compared with $251 million and $460 million for the same periods in 2006. The declines were attributable to losses, net of risk management instruments, of $38 million and $202 million for the three and six months ended June 30, 2007 from sales of subprime mortgage loans and declines in the fair values of subprime mortgage loans held for sale. Secondary market conditions for subprime mortgage loans rapidly deteriorated during the first half of 2007 in response to the weakening housing market. As investor concerns related to rising subprime borrower defaults increased, higher credit risk premiums were priced into subprime mortgage bonds delivered into the secondary market channels, which adversely affected the valuations of the Company’s subprime mortgage loans. The performance of the Company’s prime mortgage products during the first half of 2007 partially offset the decline in net gain on sale results. Secondary market demand was more favorable for prime mortgages during the first half of 2007, as the disruption in the subprime mortgage market prompted market participants to seek mortgage investment products of higher credit quality.

The fair value changes in home mortgage loans held for sale and the offsetting changes in the derivative instruments used as fair value hedges are recorded within gain from home mortgage loans when hedge accounting treatment is achieved. Home mortgage loans held for sale where hedge accounting treatment is not achieved are recorded at the lower of cost or fair value. This accounting method requires declines in the fair value of these loans, to the extent such value is below their cost basis, to be immediately recognized within gain from home mortgage loans, but any increases in the value of these loans that exceed their original cost basis may not be recorded until the loans are sold. However, all changes in the value of derivative instruments that are used to manage the interest rate risk of these loans must be recognized in earnings as those changes occur.

All Other Noninterest Income Analysis

Revenue from sales and servicing of consumer loans decreased $21 million for the three months ended June 30, 2007 compared with the same period in 2006. The realization of higher than originally estimated interest and fees charged on securitized loans and lower than originally estimated credit losses resulted in increased servicing revenues during the second quarter of 2006 as compared with the same period in 2007. Revenue from sales and servicing of consumer loans increased $45 million for the six months ended June 30, 2007 as compared with the same period in 2006. The increase was due to growth in servicing fee revenues due to higher levels of securitized balances and growth in sales revenue as a result of higher securitization volume.

Depositor and other retail banking fees increased $79 million and $166 million for the three and six months ended June 30, 2007, compared with the same periods in 2006, due to growth in transaction fee volume and higher transaction fees. The number of noninterest-bearing checking accounts at June 30, 2007 totaled approximately 10.4 million, compared with approximately 9.1 million at June 30, 2006.

Credit card fees increased $31 million and $64 million for the three and six months ended June 30, 2007 as compared with the same periods in 2006, primarily reflecting growth in the credit card portfolio.

32




Securities fees and commissions increased by more than 20%, primarily due to increases in fees and commissions related to a higher volume of mutual fund and annuity sales.

The decline in the performance of trading assets, excluding revaluation gains and losses from trading securities used to economically hedge the MSR, for the three and six months ended June 30, 2007, compared with the same periods in 2006, was largely due to downward adjustments to the fair value of trading assets retained from subprime mortgage loan securitizations. Similar to the way in which market conditions adversely affected the Company’s net gain on sale results, the weakening housing market and rising levels of subprime borrower delinquencies diminished the fair value of subprime residual assets. Declines in the fair value of such assets totaled $93 million and $181 million for the three and six months ended June 30, 2007.

Substantially all of the gain from sales of other available-for-sale securities during the six months ended June 30, 2007 was due to the sale of privately-issued mortgage-backed securities. Approximately $4.3 billion of available-for-sale securities were sold during the first half of 2007.

The decrease in other income for the six months ended June 30, 2007 compared with the same period in 2006 was due to a $134 million goodwill litigation award recorded in the first quarter of 2006 from the partial settlement of the Company’s claim against the U.S. Government with regard to the Home Savings supervisory goodwill lawsuit.

Noninterest Expense

Noninterest expense from continuing operations consisted of the following:

 

 

Three Months Ended
June 30,

 

Percentage

 

Six Months Ended
June 30,

 

Percentage

 

 

 

   2007   

 

   2006   

 

Change

 

   2007   

 

   2006   

 

Change

 

 

 

(dollars in millions)

 

Compensation and benefits

 

 

$

977

 

 

 

$

1,021

 

 

 

(4

)%

 

 

$

1,979

 

 

 

$

2,054

 

 

 

(4

)%

 

Occupancy and equipment

 

 

354

 

 

 

435

 

 

 

(18

)

 

 

731

 

 

 

826

 

 

 

(12

)

 

Telecommunications and outsourced information services

 

 

132

 

 

 

145

 

 

 

(9

)

 

 

261

 

 

 

279

 

 

 

(7

)

 

Depositor and other retail banking losses

 

 

58

 

 

 

51

 

 

 

13

 

 

 

119

 

 

 

108

 

 

 

11

 

 

Advertising and promotion

 

 

113

 

 

 

117

 

 

 

(3

)

 

 

211

 

 

 

211

 

 

 

 

 

Professional fees

 

 

55

 

 

 

45

 

 

 

22

 

 

 

93

 

 

 

81

 

 

 

15

 

 

Postage

 

 

106

 

 

 

122

 

 

 

(13

)

 

 

214

 

 

 

245

 

 

 

(13

)

 

Other expense

 

 

343

 

 

 

293

 

 

 

17

 

 

 

636

 

 

 

563

 

 

 

13

 

 

Total noninterest expense

 

 

$

2,138

 

 

 

$

2,229

 

 

 

(4

)

 

 

$

4,244

 

 

 

$

4,367

 

 

 

(3

)

 

 

Employee compensation and benefits expense decreased during the three and six months ended June 30, 2007 compared with the same periods in 2006 primarily due to the reduction in the total number of employees. The number of employees decreased from 56,247 at June 30, 2006 to 49,989 at June 30, 2007. The decrease was partially offset by lower levels of deferred compensation costs resulting from a decline in loan originations in the first half of 2007.

Occupancy and equipment expense for the three and six months ended June 30, 2006 included $49 million and $57 million related to the Company’s productivity and efficiency initiatives.

Other expense increased during the three and six months ended June 30, 2007 compared with the same periods in 2006 primarily due to higher levels of foreclosed assets expense, reflecting the slowdown in the housing market, and an increase in training expense.

33




Review of Financial Condition

Available-for-sale securities consisted of the following:

 

 

June 30, 2007

 

 

 

Amortized
Cost

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair
Value

 

 

 

(in millions)

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government

 

 

$

28

 

 

 

$

 

 

 

$

(2

)

 

$

26

 

Agency

 

 

8,038

 

 

 

41

 

 

 

(161

)

 

7,918

 

Private label

 

 

12,182

 

 

 

17

 

 

 

(333

)

 

11,866

 

Total mortgage-backed securities

 

 

20,248

 

 

 

58

 

 

 

(496

)

 

19,810

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government

 

 

429

 

 

 

 

 

 

(9

)

 

420

 

Agency

 

 

4,014

 

 

 

 

 

 

(81

)

 

3,933

 

U.S. states and political subdivisions

 

 

1,957

 

 

 

6

 

 

 

(47

)

 

1,916

 

Other debt securities

 

 

2,233

 

 

 

5

 

 

 

(29

)

 

2,209

 

Equity securities

 

 

53

 

 

 

 

 

 

(1

)

 

52

 

Total investment securities

 

 

8,686

 

 

 

11

 

 

 

(167

)

 

8,530

 

Total available-for-sale securities

 

 

$

28,934

 

 

 

$

69

 

 

 

$

(663

)

 

$

28,340

 

 

 

 

December 31, 2006

 

 

 

Amortized
Cost

 

Unrealized
Gains

 

Unrealized
Losses

 

Fair
Value

 

 

 

(in millions)

 

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government

 

 

$

28

 

 

 

$

 

 

 

$

(1

)

 

$

27

 

Agency

 

 

8,657

 

 

 

55

 

 

 

(85

)

 

8,627

 

Private label

 

 

9,472

 

 

 

41

 

 

 

(104

)

 

9,409

 

Total mortgage-backed securities

 

 

18,157

 

 

 

96

 

 

 

(190

)

 

18,063

 

Investment securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government

 

 

403

 

 

 

 

 

 

(6

)

 

397

 

Agency

 

 

3,350

 

 

 

9

 

 

 

(33

)

 

3,326

 

U.S. states and political subdivisions

 

 

1,330

 

 

 

18

 

 

 

(3

)

 

1,345

 

Other debt securities

 

 

1,745

 

 

 

18

 

 

 

(4

)

 

1,759

 

Equity securities

 

 

88

 

 

 

1

 

 

 

(1

)

 

88

 

Total investment securities

 

 

6,916

 

 

 

46

 

 

 

(47

)

 

6,915

 

Total available-for-sale securities

 

 

$

25,073

 

 

 

$

142

 

 

 

$

(237

)

 

$

24,978

 

 

Unrealized losses on available-for-sale securities were $663 million at June 30, 2007. Declines in fair value resulted from rising market interest rates.

The realized gross gains and losses of available-for-sale securities for the periods indicated were as follows:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

    2007    

 

    2006    

 

    2007    

 

    2006    

 

 

 

(in millions)

 

Realized gross gains

 

 

$

20

 

 

 

$

48

 

 

 

$

59

 

 

 

$

101

 

 

Realized gross losses

 

 

(13

)

 

 

(48

)

 

 

(18

)

 

 

(102

)

 

Realized net gain (loss)

 

 

$

7

 

 

 

$

 

 

 

$

41

 

 

 

$

(1

)

 

 

34




Loans

Total loans consisted of the following:

 

 

June 30,
2007

 

December 31,
2006

 

 

 

(in millions)

 

Loans held for sale

 

$

19,327

 

 

$

44,970

 

 

Loans held in portfolio:

 

 

 

 

 

 

 

Loans secured by real estate:

 

 

 

 

 

 

 

Home loans (1)

 

$

88,543

 

 

$

99,479

 

 

Home equity loans and lines of credit (1)

 

55,776

 

 

52,882

 

 

Subprime mortgage channel (2) :

 

 

 

 

 

 

 

Home loans

 

17,602

 

 

18,725

 

 

Home equity loans and lines of credit

 

2,855

 

 

2,042

 

 

Home construction (3)

 

2,058

 

 

2,082

 

 

Multi-family

 

29,290

 

 

30,161

 

 

Other real estate

 

6,879

 

 

6,745

 

 

Total loans secured by real estate

 

203,003

 

 

212,116

 

 

Consumer:

 

 

 

 

 

 

 

Credit card

 

9,913

 

 

10,861

 

 

Other

 

243

 

 

276

 

 

Commercial

 

1,835

 

 

1,707

 

 

Total loans held in portfolio (4)

 

$

214,994

 

 

$

224,960

 

 


(1)                  Excludes home loans and home equity loans and lines of credit in the subprime mortgage channel.

(2)                  Represents mortgage loans purchased from recognized subprime lenders and mortgage loans originated under the Long Beach Mortgage name and held in the investment portfolio.

(3)                  Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale and construction loans made directly to the intended occupant of a single-family residence.

(4)                  Includes net unamortized deferred loan origination costs of $1.33 billion and $1.48 billion at June 30, 2007 and December 31, 2006.

Loans held for sale totaled $19.33 billion at June 30, 2007, a decrease of $25.64 billion from $44.97 billion at December 31, 2006, primarily due to the sale of approximately $17.5 billion of lower-yielding, medium-term adjustable-rate home loans during the first quarter of 2007.

35




Total home loans held in portfolio, including those within the subprime mortgage channel, consisted of the following:

 

 

June 30,
2007

 

December 31,
2006

 

 

 

(in millions)

 

Home loans:

 

 

 

 

 

 

 

Short-term adjustable-rate loans (1) :

 

 

 

 

 

 

 

Option ARMs (2)

 

$

53,455

 

 

$

63,557

 

 

Other ARMs

 

6,787

 

 

6,791

 

 

Total short-term adjustable-rate loans

 

60,242

 

 

70,348

 

 

Medium-term adjustable-rate loans (3)

 

25,426

 

 

26,232

 

 

Fixed-rate loans

 

2,875

 

 

2,899

 

 

Home loans held in portfolio (4)

 

88,543

 

 

99,479

 

 

Subprime mortgage channel

 

17,602

 

 

18,725

 

 

Total home loans held in portfolio

 

$

106,145

 

 

$

118,204

 

 


(1)                  Short-term adjustable-rate loans reprice within one year.

(2)                  The total amount by which the unpaid principal balance of Option ARM loans exceeded their original principal amount was $1.30 billion and $888 million at June 30, 2007 and December 31, 2006.

(3)                  Medium-term adjustable-rate loans reprice after one year.

(4)                  Excludes home loans in the subprime mortgage channel.

The Option ARM home loan portfolio continued to decline during the first half of the year, reflecting an interest rate environment in which loan products that are priced according to shorter-term interest rate indices are less desirable.

Other Assets

Other assets consisted of the following:

 

 

June 30,
2007

 

December 31,
2006

 

 

 

(in millions)

 

Accounts receivable

 

$

5,219

 

 

$

5,566

 

 

Investment in bank-owned life insurance

 

4,971

 

 

4,373

 

 

Premises and equipment

 

2,905

 

 

3,042

 

 

Accrued interest receivable

 

1,778

 

 

1,941

 

 

Derivatives

 

1,105

 

 

748

 

 

Identifiable intangible assets

 

468

 

 

556

 

 

Foreclosed assets

 

750

 

 

480

 

 

Other

 

3,071

 

 

3,231

 

 

Total other assets

 

$

20,267

 

 

$

19,937

 

 

 

36




Deposits

Deposits consisted of the following:

 

 

June 30,
2007

 

December 31,
2006

 

 

 

(in millions)

 

Retail deposits:

 

 

 

 

 

 

 

Checking deposits:

 

 

 

 

 

 

 

Noninterest bearing

 

$

24,142

 

 

$

22,838

 

 

Interest bearing

 

29,592

 

 

32,723

 

 

Total checking deposits

 

53,734

 

 

55,561

 

 

Savings and money market deposits

 

43,617

 

 

41,943

 

 

Time deposits

 

48,140

 

 

46,821

 

 

Total retail deposits

 

145,491

 

 

144,325

 

 

Commercial business and other deposits

 

19,186

 

 

15,175

 

 

Brokered deposits:

 

 

 

 

 

 

 

Consumer

 

17,153

 

 

22,299

 

 

Institutional

 

11,025

 

 

22,339

 

 

Custodial and escrow deposits

 

8,525

 

 

9,818

 

 

Total deposits

 

$

201,380

 

 

$

213,956

 

 

 

Brokered deposits decreased $16.46 billion or 37% from year-end 2006 as the Company’s funding requirements from non-retail deposit sources diminished with the reduction in the size of the balance sheet. As a result, overall deposits decreased by $12.58 billion or 6%.

Transaction accounts (checking, savings and money market deposits) comprised 67% of retail deposits at June 30, 2007 and 68% at year-end 2006. These products generally have the benefit of lower interest costs, compared with time deposits, and represent the core customer relationship that is maintained within the retail banking franchise. Average total deposits funded 74% of average total interest-earning assets in the second quarter of 2007, compared with 68% in the fourth quarter of 2006.

Borrowings

FHLB advances of $21.41 billion at June 30, 2007 decreased $22.89 billion, or 52%, from December 31, 2006 primarily reflecting the reduction in the Company’s funding requirements resulting from the contraction in the balance sheet during the six months ended June 30, 2007. In addition, growth in lower-cost retail deposits also reduced the need for FHLB advances. The $7.46 billion increase in other borrowings was due to the ongoing diversification of the Company’s funding sources.

Capital Surplus-Common Stock

The Company’s capital surplus totaled $2.72 billion at June 30, 2007, compared with $5.83 billion at December 31, 2006. The decrease was due to the Company’s common stock repurchase transactions. During the six months ended June 30, 2007, the Company repurchased approximately 75 million of its common shares.

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 Company’s operating segments are defined by the products and services they offer. 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

37




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. Refer to Note 8 to the Consolidated Financial Statements – “Operating Segments” for information regarding the key elements of management reporting methodologies used to measure segment performance.

The Company serves the needs of 19.6 million consumer households through its 2,235 retail banking stores, 461 lending stores and centers, 3,953 ATMs, telephone call centers and online banking.

Financial highlights by operating segment were as follows:

Retail Banking Group

 

 

Three Months Ended
June 30,

 

Percentage

 

Six Months Ended
June 30,

 

Percentage

 

 

 

2007

 

2006

 

Change

 

2007

 

2006

 

Change

 

 

 

(dollars in millions)

 

Condensed income statement:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

1,283

 

$

1,323

 

 

(3

) %

 

$

2,558

 

$

2,670

 

 

(4

) %

 

Provision for loan and lease losses

 

91

 

13

 

 

606

 

 

153

 

67

 

 

128

 

 

Noninterest income

 

819

 

732

 

 

12

 

 

1,571

 

1,401

 

 

12

 

 

Inter-segment revenue

 

21

 

16

 

 

23

 

 

43

 

30

 

 

43

 

 

Noninterest expense

 

1,139

 

1,109

 

 

3

 

 

2,215

 

2,197

 

 

1

 

 

Income from continuing operations before income taxes

 

893

 

949

 

 

(6

)

 

1,804

 

1,837

 

 

(2

)

 

Income taxes

 

335

 

363

 

 

(8

)

 

677

 

702

 

 

(4

)

 

Income from continuing operations

 

558

 

586

 

 

(5

)

 

1,127

 

1,135

 

 

(1

)

 

Income from discontinued operations

 

 

8

 

 

 

 

 

17

 

 

 

 

Net income

 

$

558

 

$

594

 

 

(6

)

 

$

1,127

 

$

1,152

 

 

(2

)

 

Performance and other data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Efficiency ratio

 

53.65

%

53.53

%

 

 

 

53.09

%

53.57

%

 

(1

)

 

Average loans

 

$

149,716

 

$

182,891

 

 

(18

)

 

$

152,445

 

$

178,396

 

 

(15

)

 

Average assets

 

159,518

 

193,246

 

 

(17

)

 

162,267

 

188,721

 

 

(14

)

 

Average deposits

 

145,252

 

138,803

 

 

5

 

 

144,644

 

138,930

 

 

4

 

 

Loan volume

 

10,069

 

10,105

 

 

 

 

18,561

 

17,360

 

 

7

 

 

Employees at end of period

 

28,178

 

31,432

 

 

(10

)

 

28,178

 

31,432

 

 

(10

)

 

 

The decrease in net interest income was primarily due to a decline in the average balance of home loans, reflecting the transfer to the Home Loans Group of approximately $17.5 billion of lower-yielding, medium-term adjustable-rate home loans in the fourth quarter of 2006 and a decline in Option ARM average balances. Partially offsetting this decrease were higher levels of transfer pricing credits due to higher average balances of savings and time deposits.

The provision for loan and lease losses increased in response to increased delinquencies resulting from the downturn in the housing market. This increase was partially offset by refinements to the Company’s provisioning methodology for home equity lending in the first quarter of 2007 and prime single-family residential lending in the second quarter of 2007.

38




The increase in noninterest income was substantially due to growth in depositor and other retail banking fees of 12% in the second quarter of 2007 and 14% in the first six months of 2007 over the prior periods, reflecting higher transaction fee volume that was largely attributable to the strong increase in the number of noninterest-bearing checking accounts and higher transaction fees. The number of noninterest-bearing retail checking accounts at June 30, 2007 totaled approximately 10.4 million, compared with approximately 9.1 million at June 30, 2006. Noninterest income for the six months ended June 30, 2006 included a $21 million incentive payment received as part of the Company’s migration of its debit card business to MasterCard.

Despite a 10% decrease in employee headcount, noninterest expense increased due to higher performance-based incentive compensation and benefits.

Card Services Group (Managed basis)

 

 

Three Months Ended
June 30,

 

Percentage

 

Six Months Ended
June 30,

 

Percentage

 

 

 

2007

 

2006

 

Change

 

2007

 

2006

 

Change

 

 

(dollars in millions)

 

Condensed income statement:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

660

 

$

615

 

 

8

%

 

$

1,314

 

$

1,232

 

 

7

%

 

Provision for loan and lease losses

 

523

 

417

 

 

26

 

 

912

 

747

 

 

22

 

 

Noninterest income

 

393

 

389

 

 

1

 

 

867

 

734

 

 

18

 

 

Inter-segment expense

 

5

 

1

 

 

207

 

 

9

 

2

 

 

379

 

 

Noninterest expense

 

300

 

293

 

 

3

 

 

626

 

590

 

 

6

 

 

Income before income taxes

 

225

 

293

 

 

(23

)

 

634

 

627

 

 

1

 

 

Income taxes

 

84

 

112

 

 

(25

)

 

238

 

240

 

 

(1

)

 

Net income

 

$

141

 

$

181

 

 

(22

)

 

$

396

 

$

387

 

 

2

 

 

Performance and other data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Efficiency ratio

 

28.68

%

29.19

%

 

(2

)

 

28.82

%

30.05

%

 

(4

)

 

Average loans

 

$

24,234

 

$

20,474

 

 

18

 

 

$

23,921

 

$

20,281

 

 

18

 

 

Average assets

 

26,762

 

23,044

 

 

16

 

 

26,403

 

22,905

 

 

15

 

 

Employees at end of period

 

2,889

 

2,597

 

 

11

 

 

2,889

 

2,597

 

 

11

 

 

 

The Company evaluates the performance of the Card Services Group on a managed 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 increase in net interest income was substantially due to increased average loan balances. Partially offsetting this increase was a decline in yields due to the higher credit quality of managed receivables following the sale of higher risk credit card accounts in the fourth quarter of 2006, and higher transfer pricing charges applied to managed receivables due to higher short-term interest rates.

The increase in the provision for loan and lease losses reflects increases in managed receivables.

Noninterest income increased $133 million, or 18%, for the six months ended June 30, 2007 compared with the same period in 2006 due to higher securitization volume in 2007 and higher fee income from growth in managed credit card receivables.

Higher noninterest expense for the six months ended June 30, 2007, compared with the same period in 2006, resulted primarily from increased marketing activities and the transfer of certain back office functions from the Retail Banking Group to the Card Services Group.

39




Commercial Group

 

 

Three Months Ended
June 30,

 

Percentage

 

Six Months Ended
June 30,

 

Percentage

 

 

 

2007

 

2006

 

Change

 

2007

 

2006

 

Change

 

 

 

(dollars in millions)

 

Condensed income statement:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

195

 

$

166

 

 

17

%

 

$

395

 

$

329

 

 

20

%

 

Provision for loan and lease
losses

 

2

 

(10

)

 

 

 

(7

)

(10

)

 

(27

)

 

Noninterest income

 

62

 

17

 

 

277

 

 

76

 

29

 

 

166

 

 

Noninterest expense

 

74

 

57

 

 

29

 

 

148

 

125

 

 

19

 

 

Income before income taxes

 

181

 

136

 

 

33

 

 

330

 

243

 

 

36

 

 

Income taxes

 

68

 

52

 

 

31

 

 

124

 

93

 

 

33

 

 

Net income

 

$

113

 

$

84

 

 

35

 

 

$

206

 

$

150

 

 

37

 

 

Performance and other data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Efficiency ratio

 

28.77

%

31.28

%

 

(8

)

 

31.38

%

34.80

%

 

(10

)

 

Average loans

 

$

38,789

 

$

31,505

 

 

23

 

 

$

38,715

 

$

31,260

 

 

24

 

 

Average assets

 

41,181

 

33,709

 

 

22

 

 

41,092

 

33,522

 

 

23

 

 

Average deposits

 

6,160

 

2,242

 

 

175

 

 

4,968

 

2,250

 

 

121

 

 

Loan volume

 

4,348

 

2,961

 

 

47

 

 

8,018

 

5,731

 

 

40

 

 

Employees at end of period

 

1,404

 

1,252

 

 

12

 

 

1,404

 

1,252

 

 

12

 

 

 

The increase in net interest income was primarily due to increased interest income on a larger balance of multi-family and other commercial real estate loans. Average loan balances at June 30, 2007 reflect the acquisition of Commercial Capital Bancorp, Inc. on October 1, 2006. Partially offsetting this increase were higher transfer pricing charges applied to multi-family and other commercial real estate loans. These higher transfer pricing charges resulted from higher short-term interest rates.

The increase in noninterest income was predominantly due to gains, net of hedging and risk management instruments, of $65 million in the second quarter of 2007 associated with the Group’s commercial mortgage banking operations.

The increase in noninterest expense largely reflects the addition of Commercial Capital Bancorp, Inc. and higher commission expense due to higher loan volume.

40




Home Loans Group

 

 

Three Months Ended
June 30,

 

Percentage

 

Six Months Ended
June 30,

 

Percentage

 

 

 

2007

 

2006

 

Change

 

2007

 

2006

 

Change

 

 

 

(dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Condensed income statement:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

215

 

$

290

 

 

(26

)%

 

$

460

 

$

628

 

 

(27

)%

 

Provision for loan and lease
losses

 

101

 

38

 

 

169

 

 

150

 

57

 

 

161

 

 

Noninterest income

 

391

 

461

 

 

(15

)

 

553

 

862

 

 

(36

)

 

Inter-segment expense

 

16

 

15

 

 

3

 

 

34

 

28

 

 

21

 

 

Noninterest expense

 

548

 

617

 

 

(11

)

 

1,069

 

1,239

 

 

(14

)

 

Income (loss) before income
taxes

 

(59

)

81

 

 

 

 

(240

)

166

 

 

 

 

Income taxes (benefit)

 

(22

)

31

 

 

 

 

(90

)

63

 

 

 

 

Net income (loss)

 

$

(37

)

$

50

 

 

 

 

$

(150

)

$

103

 

 

 

 

Performance and other data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Efficiency ratio

 

92.82

%

83.80

%

 

11

 

 

109.14

%

84.70

%

 

29

 

 

Average loans

 

$

43,312

 

$

43,988

 

 

(2

)

 

$

48,255

 

$

46,934

 

 

3

 

 

Average assets

 

60,330

 

70,958

 

 

(15

)

 

65,824

 

74,541

 

 

(12

)

 

Average deposits

 

17,506

 

20,124

 

 

(13

)

 

17,139

 

18,339

 

 

(7

)

 

Loan volume

 

31,541

 

41,747

 

 

(24

)

 

62,150

 

86,745

 

 

(28

)

 

Employees at end of period

 

12,735

 

15,560

 

 

(18

)

 

12,735

 

15,560

 

 

(18

)

 

 

The decrease in net interest income was primarily due to an increase in the funds transfer pricing charge due to rising short-term interest rates that outpaced the upward repricing of loans held for sale and from a decline in the average balances of custodial deposits. Partially offsetting this decrease was a reduction in the funds transfer pricing charge resulting from the sale of approximately $2.53 billion of mortgage servicing rights in the third quarter of 2006.

The provision for loan and lease losses increased in response to the downturn in the housing market. This downturn resulted in increased delinquencies as certain customers were unable to meet their mortgage payments due to interest rates on their adjustable-rate loans resetting upwards.

The decreases in noninterest income were primarily the result of a decline in subprime mortgage secondary market performance, which resulted in net losses of approximately $38 million and $202 million for the three and six month periods ended June 30, 2007 from both the sale of subprime mortgage loans and adjustments to reflect changes in fair values of loans held for sale, net of risk management instruments. Unfavorable subprime secondary market conditions during the first half of 2007 also resulted in $93 million and $181 million of downward adjustments to the fair value of trading assets retained from subprime mortgage securitizations for the three and six month periods ended June 30, 2007. Partially offsetting these decreases were gains on the sale of prime home loans.

The decreases in noninterest expense were primarily due to lower incentive compensation expense resulting from a decline in the number of loan originations and also reflects a reduction in employee headcount as a result of the Company’s 2006 productivity and efficiency initiatives.

41




Corporate Support/Treasury and Other

 

 

Three Months Ended
June 30,

 

Percentage

 

Six Months Ended
June 30,

 

Percentage

 

 

 

2007

 

2006

 

Change

 

2007

 

2006

 

Change

 

 

 

(dollars in millions)

 

Condensed income statement:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income (expense)

 

$

2

 

$

(60

)

 

%

 

$

(13

)

$

(104

)

 

(87

)%

 

Provision for loan and lease losses

 

(51

)

(17

)

 

232

 

 

(25

)

(113

)

 

(78

)

 

Noninterest income (expense)

 

42

 

(88

)

 

 

 

123

 

63

 

 

97

 

 

Noninterest expense

 

77

 

153

 

 

(50

)

 

186

 

216

 

 

(14

)

 

Minority interest expense

 

42

 

37

 

 

15

 

 

85

 

37

 

 

129

 

 

Loss before income taxes

 

(24

)

(321

)

 

(93

)

 

(136

)

(181

)

 

(25

)

 

Income taxes (benefit)

 

(38

)

(129

)

 

(70

)

 

(109

)

(96

)

 

13

 

 

Net income (loss)

 

$

14

 

$

(192

)

 

 

 

$

(27

)

$

(85

)

 

(67

)

 

Performance and other data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average loans

 

$

1,367

 

$

1,178

 

 

16

 

 

$

1,356

 

$

1,160

 

 

17

 

 

Average assets

 

41,801

 

39,061

 

 

7

 

 

41,341

 

38,057

 

 

9

 

 

Average deposits

 

37,847

 

39,083

 

 

(3

)

 

42,002

 

36,149

 

 

16

 

 

Loan volume

 

72

 

82

 

 

(12

)

 

179

 

105

 

 

70

 

 

Employees at end of period

 

4,783

 

5,406

 

 

(12

)

 

4,783

 

5,406

 

 

(12

)

 

 

The improvement in net interest income for the three and six month periods ended June 30, 2007 was primarily due to lower interest expense on lower average balances of higher cost borrowings.

The improvement in noninterest income was predominantly due to the sale of mortgage servicing rights in the third quarter of 2006, which resulted in a $157 million downward adjustment to MSR fair value in the second quarter of 2006.

Noninterest expense for the three and six months ended June 30, 2006 included $81 million and $108 million in charges related to the Company’s productivity and efficiency initiatives. Offsetting the charges in the six months ended June 30, 2006 was a $25 million decrease to compensation and benefits expense due to the one-time cumulative effect of the Company’s adoption of Statement No. 123R, Share-Based Payment , on January 1, 2006.

Minority interest expense represents dividends on preferred securities that were issued by a subsidiary during 2006.

Off-Balance Sheet Activities

The Company transforms loans into securities through a process known as securitization. When the Company securitizes loans, the loans are usually sold to a qualifying special-purpose entity (“QSPE”), typically a trust. The QSPE, in turn, issues securities, commonly referred to as asset-backed securities, which are secured by future cash flows on the sold loans. The QSPE sells the securities to investors, which entitle the investors to receive specified cash flows during the term of the security. The QSPE uses the proceeds from the sale of these securities to pay the Company for the loans sold to the QSPE. These QSPEs are not consolidated within the financial statements since they satisfy the criteria established by Statement No. 140 , Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities . In general, these criteria require the QSPE to be legally isolated from the transferor (the Company), be limited to permitted activities, and have defined limits on the types of assets it can hold and the permitted sales, exchanges or distributions of its assets.

When the Company sells or securitizes loans that it originated, it generally retains the right to service the loans and may retain senior, subordinated, residual, and other interests, all of which are considered retained interests in the sold or securitized assets. Retained interests in mortgage loan securitizations,

42




excluding the rights to service such loans, were $2.92 billion at June 30, 2007, of which $2.66 billion are of investment grade quality. Retained interests in credit card securitizations were $1.59 billion at June 30, 2007, of which $1.51 billion are reported as trading assets on the Company’s balance sheet. Additional information concerning securitization transactions is included in Notes 6 and 7 to the Consolidated Financial Statements – “Securitizations” and “Mortgage Banking Activities” in the Company’s 2006 Annual Report on Form 10-K.

In the ordinary course of business, the Company’s wholly-owned broker-dealer subsidiary, WaMu Capital Corp. (“WCC”) engages in open market purchases of investment grade mortgage-backed securities and holds a significant portion of the aforementioned investment grade retained interests from the Company’s mortgage loan securitizations. At June 30, 2007, the approximate amount of investment grade securities held by WCC totaled $3.46 billion. Such securities are classified as trading assets on the Company’s balance sheet.

The Company may incur liabilities under certain contractual agreements contingent upon the occurrence of certain events. A discussion of these contractual arrangements under which the Company may be held liable is included in Note 5 to the Consolidated Financial Statements – “Guarantees.”

Capital Adequacy

The regulatory capital ratios of Washington Mutual Bank (“WMB”) and Washington Mutual Bank fsb (“WMBfsb”) and minimum regulatory capital ratios to be categorized as well-capitalized were as follows:

 

 

June 30, 2007

 

Well-Capitalized

 

 

 

WMB

 

WMBfsb

 

Minimum

 

Tier 1 capital to adjusted total assets (leverage)

 

7.02

%

 

82.50

%

 

 

5.00

%

 

Adjusted Tier 1 capital to total risk-weighted assets

 

8.14

 

 

259.74

 

 

 

6.00

 

 

Total risk-based capital to total risk-weighted assets

 

12.17

 

 

260.63

 

 

 

10.00

 

 

 

The Company’s federal savings bank subsidiaries are also required by Office of Thrift Supervision regulations to maintain tangible capital of at least 1.50% of assets. WMB and WMBfsb satisfied this requirement at June 30, 2007.

The Company’s broker-dealer subsidiaries are also subject to capital requirements. At June 30, 2007, all of its broker-dealer subsidiaries were in compliance with their applicable capital requirements.

Risk Management

The Company is exposed to four major categories of risk: credit, liquidity, market and operational.

The Company’s Chief Enterprise Risk Officer is responsible for enterprise-wide risk management. The Company’s Enterprise Risk Management function oversees the identification, measurement, monitoring, control and reporting of credit, market and operational risk. The Company’s Treasury function is responsible for the measurement, management and control of liquidity risk. The Internal Audit function, which reports to the Audit Committee of the Board of Directors, independently assesses the Company’s compliance with risk management controls, policies and procedures.

The Board of Directors, assisted by the Audit and Finance Committees on certain delegated matters, oversees the Company’s monitoring and controlling of significant risk exposures, including the Company’s policies governing risk management. The Corporate Relations Committee of the Board of Directors oversees the Company’s reputation and those elements of operational risk that impact the Company’s reputation. Governance and oversight of credit, liquidity and market risks are provided by the Finance Committee of the Board of Directors. Governance and oversight of operational risks are provided by the Audit Committee of the Board of Directors. Risk oversight is also provided by management committees whose membership includes representation from the Company’s lines of business and the Enterprise Risk

43




Management function. These committees include the Enterprise Risk Management Committee, the Credit Risk Management Committee, the Market Risk Committee and the Operational Risk Committee.

Enterprise Risk Management works with the lines of business to establish appropriate policies, standards and limits designed to maintain risk exposures within the Company’s risk tolerance Significant risk management policies approved by the relevant management committees are also reviewed and approved by the Audit and Finance Committees. Enterprise Risk Management also provides objective oversight of risk elements inherent in the Company’s business activities and practices, oversees compliance with laws and regulations, and reports periodically to the Board of Directors.

Management is responsible for balancing risk and reward in determining and executing business strategies. Business lines, Enterprise Risk Management and Treasury divide the responsibilities of conducting measurement and monitoring of the Company’s risk exposures. Risk exceptions, depending on their type and significance, are elevated to management or Board committees responsible for oversight.

Credit Risk Management

Credit risk is the risk of loss arising from adverse changes in a borrower’s or counterparty’s ability to meet its financial obligations under agreed-upon terms and exists primarily in lending and derivative portfolios. The degree of credit risk will vary based on many factors including the size of the asset or transaction, the credit characteristics of the borrower, features of the loan product or derivative, the contractual terms of the related documents and the availability and quality of collateral. Credit risk management is based on analyzing the creditworthiness of the borrower, the adequacy of underlying collateral given current events and conditions, and the existence and strength of any guarantor support.

During the first half of 2007, deteriorating conditions in the U.S. housing market and increased payments on certain adjustable-rate mortgages that repriced upward at the expiration of their fixed rate periods have resulted in increased balances of nonaccrual loans and higher charge-offs. The combination of lower volumes of home sales transactions, longer marketing periods, growing inventories of unsold homes and increased foreclosure rates has exerted downward pressure on housing prices in many parts of the country, resulting in declining home price appreciation rates in many markets and absolute declines in property values in certain markets. Faced with these conditions, some borrowers have been unable to either refinance or sell their properties and consequently have defaulted on their loans. In certain circumstances, especially with loans that were funded more recently, these factors have resulted in increased severity of loss on residential loan charge-offs as lower collateral values on foreclosed properties have been insufficient to cover the recorded investment in the loan.

As explained in the introductory paragraphs of the “Credit Risk Management” section of the Company’s 2006 Annual Report on Form 10-K, the Company believes that loan-to-value ratios are one of the two key determinants in determining future loan performance. The tables below analyze the composition of the unpaid principal loan balances (“UPB”) in the Company’s home loan portfolio at June 30, 2007 by reference to loan-to-value ratios:

 

 

Loan-to-Value Ratio at Origination

 

 

 

 

 

80% (1)

 

>80-90%

 

>90%

 

Total UPB

 

 

 

(in millions)

 

Option ARMs

 

$

50,619

 

 

$

1,648

 

 

$

191

 

$

52,458

 

Other short-term ARMs

 

10,557

 

 

2,396

 

 

280

 

13,233

 

Medium-term adjustable-rate loans

 

26,883

 

 

1,668

 

 

472

 

29,023

 

Fixed-rate loans

 

6,958

 

 

2,264

 

 

333

 

9,555

 

Total home loans held in portfolio

 

$

95,017

 

 

$

7,976

 

 

$

1,276

 

$

104,269

 


(1)                  This category includes home loans that are insured by the Federal Housing Administration (“FHA”) or guaranteed by the Department of Veterans Affairs (“VA”), as well as home loans with private mortgage insurance. 

44




Included in the home loan balances disclosed above are the following types of home loans:

 

 

Loan-to-Value Ratio at Origination

 

 

 

 

80% (1)

 

>80-90%

 

>90%

 

Total UPB

 

 

 

(in millions)

 

Interest-only

 

$

14,929

 

 

$

531

 

 

 

$

126

 

 

 

$

15,586

 

 

Subprime mortgage channel

 

10,981

 

 

5,567

 

 

 

707

 

 

 

17,255

 

 


(1)                  This category includes home loans that are insured by the Federal Housing Administration (“FHA”) or guaranteed by the Department of Veterans Affairs (“VA”), as well as home loans with private mortgage insurance.

Nonaccrual Loans, Foreclosed Assets and Restructured Loans

Loans, excluding credit card loans, are generally placed on nonaccrual status upon reaching 90 days past due. Additionally, individual loans in non-homogeneous portfolios are placed on nonaccrual status prior to becoming 90 days past due when payment in full of principal or interest by the borrower is not expected. Management’s classification of a loan as nonaccrual or restructured does not necessarily indicate that the principal or interest of the loan is uncollectible in whole or in part. Nonaccrual loans and foreclosed assets (“nonperforming assets”) consisted of the following:

 

 

June 30,
2007

 

March 31,
2007

 

December 31,
2006

 

 

 

(dollars in millions)

 

Nonperforming assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

Nonaccrual loans (1)(2) :

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans secured by real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

Home loans (3)

 

 

$

991

 

 

 

$

690

 

 

 

$

640

 

 

Home equity loans and lines of credit (3)

 

 

378

 

 

 

297

 

 

 

231

 

 

Subprime mortgage channel (4)

 

 

1,707

 

 

 

1,503

 

 

 

1,283

 

 

Home construction (5)

 

 

47

 

 

 

41

 

 

 

27

 

 

Multi-family

 

 

69

 

 

 

60

 

 

 

46

 

 

Other real estate

 

 

52

 

 

 

52

 

 

 

51

 

 

Total nonaccrual loans secured by real estate

 

 

3,244

 

 

 

2,643

 

 

 

2,278

 

 

Consumer

 

 

1

 

 

 

1

 

 

 

1

 

 

Commercial

 

 

30

 

 

 

28

 

 

 

16

 

 

Total nonaccrual loans held in portfolio

 

 

3,275

 

 

 

2,672

 

 

 

2,295

 

 

Foreclosed assets (6)

 

 

750

 

 

 

587

 

 

 

480

 

 

Total nonperforming assets (7)

 

 

$

4,025

 

 

 

$

3,259

 

 

 

$

2,775

 

 

Total nonperforming assets as a percentage of total assets

 

 

1.29

%

 

 

1.02

%

 

 

0.80

%

 


(1)                  Nonaccrual loans held for sale, which are excluded from the nonaccrual balances presented above, were $171 million, $195 million and $185 million at June 30, 2007, March 31, 2007 and December 31, 2006. Loans held for sale are accounted for at lower of aggregate cost or fair value, with valuation changes included as adjustments to noninterest income.

(2)                  Credit card loans are exempt under regulatory rules from being classified as nonaccrual because they are charged off when they are determined to be uncollectible, or by the end of the month in which the account becomes 180 days past due.

(3)                  Excludes home loans and home equity loans and lines of credit in the subprime mortgage channel.

(4)                  Represents mortgage loans purchased from recognized subprime lenders and mortgage loans originated under the Long Beach Mortgage name and held in the investment portfolio.

(5)                  Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale and construction loans made directly to the intended occupant of a single-family residence.

(6)                  Foreclosed real estate securing Government National Mortgage Association (“GNMA”) loans of $49 million, $72 million and $99 million at June 30, 2007, March 31, 2007 and December 31, 2006 have been excluded. These assets are fully collectible as the corresponding GNMA loans are insured by the FHA or guaranteed by the VA.

(7)                  Excludes accruing restructured loans of $285 million, $355 million and $330 million at June 30, 2007, March 31, 2007 and December 31, 2006.

45




The increase in the ratio of nonperforming assets to total assets to 1.29% at June 30, 2007, from 0.80% at December 31, 2006, primarily reflects deteriorating conditions in the U.S. housing market and difficulty experienced by certain borrowers in meeting their monthly mortgage payments as interest rates on their adjustable rate loans have repriced upwards.  Increases in nonaccrual loans in California and Florida since December 31, 2006, accounted for a majority of the increase in nonaccrual loans over this period. The increase in nonaccrual loans in the second quarter of 2007 also reflects the absence of a nonperforming home loan sale in that quarter due to unfavorable pricing as the result of a significant widening of credit spreads in the secondary market. The Company expects to resume nonaccrual loan sales when secondary market conditions stabilize.

Increases in nonaccrual Option ARMs accounted for substantially all of the increase in nonaccrual home loans since December 31, 2006. At June 30, 2007, nonaccrual Option ARMs represented 1.27% of the Option ARM portfolio, an increase from 0.62% at December 31, 2006.

Allowance for Loan and Lease Losses

The allowance for loan and lease losses represents management’s estimate of incurred credit losses inherent in the Company’s loan and lease portfolios as of the balance sheet date. The estimation of the allowance is based on a variety of factors, including past loan loss experience, the current credit profile of borrowers, adverse situations that have occurred that may affect the borrowers’ ability to repay, the estimated value of underlying collateral, the interest rate climate as it affects adjustable-rate loans and general economic conditions. Determining the adequacy of the allowance is complex and requires judgment by management about the effect of matters that are inherently uncertain. Subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for loan and lease losses in future periods.

The dynamics involved in determining inherent credit losses can vary considerably based on the existence, type and quality of the security underpinning the loan and the credit characteristics of the borrower. Hence, real estate secured loans are generally accorded a proportionately lower allowance for loan and lease losses than unsecured credit card loans held in portfolio. Similarly, loans to higher risk borrowers, in the absence of mitigating factors, are generally accorded a proportionately higher allowance for loan and lease losses. Certain real estate secured loans that have features which may result in increased credit risk when compared with real estate secured loans without those features are discussed in the Company’s 2006 Annual Report on Form 10-K, “Credit Risk Management – Features of Residential Loans” and Note 5 to the Consolidated Financial Statements – “Loans and Allowance for Loan and Lease Losses – Features of Residential Loans.”

In determining the allowance for loan and lease losses, the Company allocates a portion of the allowance to its various loan product categories based on an analysis of individual loans and pools of loans. The tools utilized for this determination include statistical forecasting models that estimate the default and loss outcomes based on an evaluation of past performance of loans in the Company’s portfolio and other factors as well as industry historical loan loss data (primarily for homogeneous loan portfolios). Non-homogeneous loans are individually reviewed and assigned loss factors commensurate with the applicable level of estimated risk.

Refer to Note 1 to the Consolidated Financial Statements – “Summary of Significant Accounting Policies” in the Company’s 2006 Annual Report on Form 10-K for further discussion of the Allowance for Loan and Lease Losses.

46




Changes in the allowance for loan and lease losses were as follows:

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(dollars in millions)

 

Balance, beginning of period

 

$

1,540

 

$

1,642

 

$

1,630

 

$

1,695

 

Allowance transferred to loans held for sale

 

(81

)

(87

)

(229

)

(117

)

Other

 

 

 

7

 

 

Provision for loan and lease losses

 

372

 

224

 

606

 

306

 

 

 

1,831

 

1,779

 

2,014

 

1,884

 

Loans charged off:

 

 

 

 

 

 

 

 

 

Loans secured by real estate:

 

 

 

 

 

 

 

 

 

Home loans (1)

 

(21

)

(11

)

(57

)

(22

)

Home equity loans and lines of credit (1)

 

(55

)

(6

)

(84

)

(11

)

Subprime mortgage channel (2)

 

(103

)

(21

)

(143

)

(41

)

Home construction (3)

 

(1

)

 

(1

)

(1

)

Other real estate

 

(1

)

 

(1

)

(2

)

Total loans secured by real estate

 

(181

)

(38

)

(286

)

(77

)

Consumer:

 

 

 

 

 

 

 

 

 

Credit card

 

(106

)

(94

)

(202

)

(156

)

Other

 

(2

)

(6

)

(5

)

(13

)

Commercial

 

(15

)

(4

)

(23

)

(12

)

Total loans charged off

 

(304

)

(142

)

(516

)

(258

)

Recoveries of loans previously charged off:

 

 

 

 

 

 

 

 

 

Loans secured by real estate:

 

 

 

 

 

 

 

 

 

Home loans (1)

 

1

 

1

 

2

 

1

 

Home equity loans and lines of credit (1)

 

3

 

3

 

6

 

4

 

Subprime mortgage channel (2)

 

11

 

1

 

12

 

1

 

Multi-family

 

 

1

 

 

1

 

Other real estate

 

-

 

1

 

1

 

2

 

Total loans secured by real estate

 

15

 

7

 

21

 

9

 

Consumer:

 

 

 

 

 

 

 

 

 

Credit card

 

15

 

15

 

31

 

18

 

Other

 

 

3

 

6

 

8

 

Commercial

 

3

 

1

 

4

 

2

 

Total recoveries of loans previously charged off

 

33

 

26

 

62

 

37

 

Net charge-offs

 

(271

)

(116

)

(454

)

(221

)

Balance, end of period

 

$

1,560

 

$

1,663

 

$

1,560

 

$

1,663

 

Net charge-offs (annualized) as a percentage of average loans held in portfolio

 

0.50

%

0.19

%

0.41

%

0.19

%

Allowance as a percentage of loans held in portfolio

 

0.73

 

0.68

 

0.73

 

0.68

 


(1)                  Excludes home loans and home equity loans and lines of credit in the subprime mortgage channel.

(2)                  Represents mortgage loans purchased from recognized subprime lenders and mortgage loans originated under the Long Beach Mortgage name and held in the investment portfolio. Charge-offs in the second quarter of 2007 include $26 million of amounts primarily related to uncollected borrower expenses incurred in prior periods by and owed to a third party loan servicer.

(3)                  Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale and construction loans made directly to the intended occupant of a single-family residence.

47




90 Days or More Past Due and Still Accruing

The total amount of loans held in portfolio, excluding credit card loans, that were 90 days or more contractually past due and still accruing interest was $98 million at June 30, 2007 and $97 million at March 31, 2007 and December 31, 2006. The majority of these loans are either VA- or FHA-insured with little or no risk of loss of principal or interest. Managed credit card loans that were 90 days or more contractually past due and still accruing interest were $603 million, $602 million and $586 million at June 30, 2007, March 31, 2007 and December 31, 2006, including $128 million, $109 million and $113 million related to loans held in portfolio. The delinquency rate on managed credit card loans that were 30 days or more delinquent at June 30, 2007, March 31, 2007 and December 31, 2006 was 5.11%, 5.15% and 5.25%. Credit card loans are charged-off when they are determined to be uncollectible or by the end of the month in which the account becomes 180 days past due.

Delinquent mortgages contained within GNMA servicing pools that were repurchased or were eligible to be repurchased by the Company are reported as loans held for sale. Substantially all of these loans are either guaranteed or insured by agencies of the federal government and therefore do not expose the Company to significant risk of credit loss. The Company’s held for sale portfolio contained $9 million, $22 million and $37 million of such loans that were 90 days or more contractually past due and still accruing interest at June 30, 2007, March 31, 2007 and December 31, 2006.

Derivative Counterparty Credit Risk

Derivative financial instruments expose the Company to credit risk in the event of nonperformance by counterparties to such agreements. This risk consists primarily of the termination value of agreements where the Company is in a favorable position. Credit risk related to derivative financial instruments is considered and provided for separately from the allowance for loan and lease losses. The Company manages the credit risk associated with its various derivative agreements through counterparty credit review, counterparty exposure limits and monitoring procedures. The Company obtains collateral from certain counterparties for amounts in excess of exposure limits and monitors all exposure and collateral requirements daily. The fair value of collateral received from a counterparty is continually monitored and the Company may request additional collateral from counterparties or return collateral pledged as deemed appropriate. The Company’s agreements generally include master netting agreements whereby the counterparties are entitled to settle their positions “net.”  At June 30, 2007 and December 31, 2006, the gross positive fair value of the Company’s derivative financial instruments was $1.03 billion and $618 million. The Company’s master netting agreements at June 30, 2007 and December 31, 2006 reduced the exposure to this gross positive fair value by $532 million and $339 million. The Company’s collateral against derivative financial instruments was $86 million and $16 million at June 30, 2007 and December 31, 2006. Accordingly, the Company’s net exposure to derivative counterparty credit risk at June 30, 2007 and December 31, 2006 was $412 million and $263 million.

Liquidity Risk and Capital Management

The objective of liquidity risk management is to ensure that the Company has the continuing ability to maintain cash flows that are adequate to fund operations and meet its other obligations on a timely and cost-effective basis in various market conditions. Changes in the composition of its balance sheet, the ongoing diversification of its funding sources, risk tolerance levels and market conditions are among the factors that influence the Company’s liquidity profile. The Company establishes liquidity guidelines for Washington Mutual, Inc. (“the Parent”) as well as for its banking subsidiaries.

48




 

The Parent and its banking subsidiaries have separate liquidity risk management policies and contingent funding plans as each has unique funding requirements and sources of liquidity. The Company’s banking subsidiaries also have regulatory capital requirements. The Company has policies that require current and forecasted liquidity positions to be monitored against pre-established limits and requires that contingency liquidity plans be maintained.

For the Company’s banking subsidiaries, liquidity is forecasted over short term (operational) and long term (strategic) horizons. Both approaches require minimum amounts of liquidity that exceed forecasted needs (excess liquidity). Whereas the focus for operational liquidity is to maintain sufficient excess liquidity to satisfy unanticipated funding requirements, strategic liquidity focuses on stress-testing liquidity risks and ensuring that sufficient excess liquidity is maintained under various scenarios to meet policy standards.

The Company continues to reduce its borrowing from the FHLBs and diversify its wholesale funding sources. Pursuant to this strategy and reflecting reduced funding requirements, in the second quarter of 2007, the Company repaid maturing FHLB advances of $3.32 billion, ending the quarter with $21.41 billion of FHLB advances.

Parent

The Parent’s primary sources of liquidity are dividends from subsidiaries and funds raised in various capital markets. Dividends paid by the Parent’s banking subsidiaries may fluctuate from time to time in order to ensure that both internal capital targets and various regulatory requirements related to capital adequacy are met. For more information on dividend limitations applicable to the Parent’s banking subsidiaries, refer to “Business – Regulation and Supervision” and Note 19 to the Consolidated Financial Statements – “Regulatory Capital Requirements and Dividend Restrictions” in the Company’s 2006 Annual Report on Form 10-K.

In January 2006, the Parent filed an automatically effective registration statement under which an unlimited amount of debt securities, preferred stock and depository shares were registered. The Parent’s long-term and short-term indebtedness are rated A and F1 by Fitch, A- and A2 by Standard & Poor’s and A and R-1L by DBRS. In the first quarter of 2007, Moody’s upgraded the Parent’s long-term and short-term indebtedness ratings from A3 and P2, respectively, to A2 and P1, respectively.

Liquidity sources for Washington Mutual, Inc. include a commercial paper program and a revolving credit facility. The Company’s revolving credit facility of $800 million provides credit support for the commercial paper program and is also available for general corporate purposes. At June 30, 2007, the Parent had no commercial paper outstanding and the entire amount of the revolving credit facility was available. The Parent maintains sufficient liquidity to cover all debt obligations maturing over the next twelve months.

Banking Subsidiaries

The principal sources of liquidity for the Parent’s banking subsidiaries are retail deposits, FHLB advances, repurchase agreements, federal funds purchased, the maturity and repayment of portfolio loans, securities held in the available-for-sale portfolio and loans designated as held for sale. Among these sources, retail deposits continue to provide the Company with a significant source of stable funding. The Company’s continuing ability to retain its retail deposit base and to attract new deposits depends on various factors, such as customer service satisfaction levels and the competitiveness of interest rates offered on deposit products. Washington Mutual Bank continues to have the necessary assets available to pledge as collateral for additional FHLB advances, covered bond issuances and repurchase agreements.

As part of its funding diversification strategy, Washington Mutual Bank launched a 20 billion covered bond program in September 2006. Under the program, Washington Mutual Bank may issue, from

49




time to time, floating rate US dollar-denominated mortgage bonds. Such mortgage bonds are secured principally by residential mortgage loans in Washington Mutual Bank’s portfolio. In turn, a statutory trust that is not consolidated by the Company, issues Euro-denominated covered bonds to investors. These covered bonds are secured by the mortgage bonds. At June 30, 2007, covered bonds having an aggregate value of 14 billion were available for issuance under this program.

Under the Global Bank Note Program, which was established in August 2003 and renewed in December 2005, the Bank may issue senior and subordinated notes in the United States and in international capital markets in a variety of currencies and structures. The Bank had $12.38 billion available under this program as of June 30, 2007.

For the six months ended June 30, 2007, proceeds from the sale of loans originated and held for sale was approximately $58 billion. These proceeds were, in turn, used as the primary funding source for the origination and purchase, net of principal payments, of approximately $55 billion of loans held for sale during the same period. In the Company’s experience, the sale of, and the origination and purchase of, mortgage loans are cyclical and the amount of funding that is necessary to sustain the Company’s mortgage banking operations does not typically affect overall liquidity levels.

The disruption in the subprime secondary mortgage market during the first half of 2007 has continued into the third quarter and has spread into markets for all other nonconforming residential mortgages. Since the latter part of July 2007, liquidity in the secondary market for nonconforming residential mortgage loans and securities backed by such loans has diminished significantly.

While the Company has been impacted by these events, the Company remains well-capitalized and its capital position is diversified. The Company has sufficient capital and ready access to diversified sources of liquidity to enable the Company to continue to add assets to its balance sheet. As part of its asset/liability management program, the Company routinely determines whether to place originated loans in portfolio or to sell them through secondary market channels and, reflecting its financial resources, continues to retain this flexibility as market conditions allow. Among the Company’s multiple sources of liquidity, its access to borrowings through the FHLB system remains an important component. The Company’s ongoing diversification of borrowing sources, such as those accessed through both domestic and international capital markets, has resulted in a significant paydown of FHLB advances, further augmenting this key resource.

Senior unsecured long-term obligations of WMB are rated A by Fitch, A by Standard & Poor’s, AH by DBRS and A1 from Moody’s. In the first quarter of 2007, Moody’s upgraded WMB’s unsecured long-term obligation rating from A2 to A1. Short-term obligations are rated F1 by Fitch, P1 by Moody’s, A1 by Standard & Poor’s and R1-M by DBRS.

Capital Management

Capital is generated primarily through the Company’s business operations, and the Company’s capital management program promotes the efficient use of this resource. Capital is primarily used to fund organic growth, pay dividends and repurchase shares.

The Parent has issued approximately $500 million of perpetual preferred stock and Washington Mutual Preferred Funding LLC, an indirect subsidiary of Washington Mutual Bank, has issued a total of $3 billion of high equity content securities. While high equity content securities have long been acknowledged by the OTS as qualifying elements in the composition of

50




financial institution core capital structures, the rating agencies have only recently taken a similar view. Both high equity content securities and perpetual preferred stock are included as equity components within the Company’s tangible equity to total tangible assets ratio.

As part of its capital management activities, from time to time the Company will repurchase shares to deploy excess capital. On July 18, 2006, the Company discontinued its existing share repurchase program and adopted a new share repurchase program approved by the Board of Directors (the “2006 Program”). Under the 2006 Program, the Company is authorized to repurchase up to 150 million shares of its common stock, as conditions warrant. There is no fixed termination date for the 2006 Program and purchases may be made in the open market, through block trades, accelerated share repurchase transactions, private transactions, or otherwise. During the three and six months ended June 30, 2007, the Company repurchased 13.5 million and 74.9 million shares of its common stock. The total remaining common stock repurchase authority was 54.7 million shares at June 30, 2007.

When the Company engages in share repurchases, management evaluates the relative risks and benefits of repurchasing shares in the open market, with the attendant daily trading limits and other constraints of the SEC Rule 10b-18 safe harbor, as compared with an accelerated share repurchase (“ASR”) transaction. In an ASR transaction, the Company repurchases a large block of stock at an initial specified price from a counterparty, typically a large broker-dealer, who has borrowed the shares. Upon final settlement of an ASR transaction, the initial specified price is adjusted to reflect actual prices at which the Company’s shares traded over the period of time after the initial repurchase that is specified in the ASR agreement. Through this final settlement process, market risks and costs associated with fluctuations in the Company’s stock price during the subsequent time period may be transferred from the counterparty to the Company.

ASR transactions immediately deploy the capital associated with share repurchases, making them economically more efficient than open market repurchases. Additionally, ASR transactions may be structured to include optionality or hedging arrangements that afford the Company the opportunity to mitigate price risk, and potentially mitigate the volatility of open market price fluctuations. While these benefits of an ASR transaction are significant considerations, open market repurchases are usually a more operationally efficient alternative when the Company chooses to deploy its excess capital in smaller amounts, particularly given the time required and the complexity associated with structuring an ASR transaction. In contrast, when the Company chooses to deploy its excess capital in larger amounts, an ASR transaction becomes more attractive and shares repurchased in an ASR transaction are removed upon the initiation of the repurchase when calculating earnings per share. Because ASR transactions involve more complex legal structures and counterparty risks than open market repurchases, the Company retains outside legal counsel to assist in structuring and documenting the transactions and applies its market risk and counterparty credit risk management standards. Additional information regarding these transactions is included in Note 6 to the Consolidated Financial Statements – “Common Stock.” 

Refer to Item 5 – “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” in the Company’s 2006 Annual Report on Form 10-K for additional information regarding share repurchase activities.

On July 17, 2007, the Company’s Board of Directors declared a cash dividend of 56 cents per share on the Company’s common stock payable on August 15, 2007 to shareholders of record as of July 31, 2007. In addition, the Company will pay a dividend of 40 cents per depository share of Series K Preferred Stock on September 15, 2007 to shareholders of record on September 1, 2007.

During the period July 1, 2007 through August 7, 2007, the Company repurchased 7.23 million shares of its common stock through open market repurchases and through settlement of certain of its ASR programs.

51




Additional information regarding the Company’s ASR programs is included in Note 6 to the Consolidated Financial Statements – “Common Stock.”

Capital Ratios and Regulatory Capital

The Parent is not a bank holding company and as such it is not required by the Federal Reserve Board to report its capital ratios. Nevertheless, capital ratios are integral to the Company’s capital management process and the provision of such metrics facilitates peer comparisons with Federal Reserve Board-regulated bank holding companies. Estimated ratios for the Company’s Tier 1 capital to average total assets and total risk-based capital are presented below, along with the tangible equity to total tangible assets ratio.

 

 

At June 30,

 

 

 

2007

 

2006

 

Tier 1 capital to average total assets (leverage)

 

6.09

%

6.24

%

Total risk-based capital to total risk-weighted assets

 

11.04

 

11.26

 

Tangible equity to total tangible assets

 

6.07

 

5.84

 

 

52




The regulatory capital ratios of Washington Mutual Bank and Washington Mutual Bank fsb and minimum regulatory capital ratios to be categorized as well-capitalized are included in Note 19 to the Consolidated Financial Statements – “Regulatory Capital Requirements and Dividend Restrictions” in the Company’s 2006 Annual Report on Form 10-K.

The Company’s broker-dealer subsidiaries are also subject to capital requirements. At June 30, 2007 and 2006, all of its broker-dealer subsidiaries were in compliance with their applicable capital requirements.

Market Risk Management

Market risk is defined as the sensitivity of income, fair market values and capital to changes in interest rates, foreign currency exchange rates, commodity prices and other relevant market rates or prices. The primary market risk to which the Company is exposed is interest rate risk. Substantially all of its interest rate risk arises from instruments, positions and transactions entered into for purposes other than trading. These include loans, MSR, securities, deposits, borrowings, long-term debt and derivative financial instruments.

The Company’s trading assets are primarily comprised of financial instruments that are retained from securitization transactions, or are purchased for MSR risk management purposes. The Company does not take significant short-term trading positions for the purpose of benefiting from price differences between financial instruments and between markets.

From time to time the Company issues debt denominated in foreign currencies. When such transactions occur, the Company uses derivatives to offset the associated foreign currency exchange risk.

Interest rate risk is managed within a consolidated enterprise risk management framework that includes asset/liability management and the management of specific portfolios (MSR and Other Mortgage Banking) discussed below. The principal objective of asset/liability management is to manage the sensitivity of net income to changing interest rates. Asset/liability management is governed by a policy reviewed and approved annually by the Board. The Board has delegated the oversight of the administration of this policy to the Finance Committee of the Board.

MSR Risk Management

The Company manages potential changes in the fair value of MSR through a comprehensive risk management program. The intent is to mitigate the effects of changes in MSR fair value through the use of risk management instruments. Risk management instruments may include interest rate contracts, forward rate agreements, forward purchase commitments and available-for-sale and trading securities. The securities generally consist of fixed-rate debt securities, such as U.S. Government and agency obligations and mortgage-backed securities, including principal-only strips. The interest rate contracts typically consist of interest rate swaps, interest rate swaptions, interest rate futures and interest rate caps and floors. The Company may purchase or sell option contracts, depending on the portfolio risks it seeks to manage. The Company also enters into forward commitments to purchase and sell mortgage-backed securities, which generally are comprised of fixed-rate mortgage-backed securities with 15 or 30 year maturities.

The fair value of MSR is primarily affected by changes in expected prepayments that result from changes in spot and future primary mortgage rates and in changes in other applicable market interest rates. Changes in the value of MSR risk management instruments vary based on the specific instrument. For example, changes in the fair value of interest rate swaps are driven by shifts in interest rate swap rates and the fair value of U.S. Treasury securities is based on changes in U.S. Treasury rates. Mortgage rates may move more or less than the rates on Treasury bonds or interest rate swaps. This could result in a change in the fair value of the MSR that differs from the change in fair value of the MSR risk management

52




instruments. The potential difference in the change in value between MSR and hedge instruments is what is referred to as basis risk.

The Company manages the MSR daily and adjusts the mix of instruments used to offset MSR fair value changes as interest rates and market conditions warrant. The objective is to maintain an efficient and fairly liquid mix as well as a diverse portfolio of risk management instruments with maturity ranges that correspond well to the anticipated behavior of the MSR. The Company also manages the size of the MSR asset, such as through the structuring of servicing agreements when loans are sold, and by periodically selling or purchasing servicing assets.

The Company believes this overall risk management strategy is the most efficient approach to managing MSR fair value risk. The success of this strategy, however, is dependent on management’s decisions regarding the amount, type and mix of MSR risk management instruments that are selected to manage the changes in fair value of the mortgage servicing asset. If this strategy is not successful, net income could be adversely affected.

Other Mortgage Banking Risk Management

The Company also manages the risks associated with its home loan mortgage warehouse and pipeline. The mortgage warehouse consists of funded loans intended for sale in the secondary market. The pipeline consists of commitments to originate or purchase mortgages to be sold in the secondary market. The risk associated with the mortgage pipeline and warehouse is the potential for changes in interest rates between the time the customer locks in the rate on the loan and the time the loan is sold.

The Company measures the risk profile of the mortgage warehouse and pipeline daily. To manage the warehouse and pipeline risk, management executes forward sales commitments, interest rate contracts and mortgage option contracts. A forward sales commitment protects against a rising interest rate environment, since the sales price and delivery date are already established. A forward sales commitment is different, however, from an option contract in that the Company is obligated to deliver the loan to the third party on the agreed-upon future date. Management also estimates the fallout factor, which represents the percentage of loans that are not expected to be funded, when determining the appropriate amount of pipeline risk management instruments.

Asset/Liability Risk Management

The purpose of asset/liability risk management is to assess the aggregate interest rate risk profile of the Company. Asset/liability risk analysis combines the MSR and Other Mortgage Banking activities with substantially all of the other remaining interest rate risk positions inherent in the Company’s operations.

To analyze net income sensitivity, management projects net income in a variety of interest rate scenarios, assuming both parallel and non-parallel shifts in the yield curve. These scenarios illustrate net interest income sensitivity that results from changes in the slope of the yield curve and changes in the spread between Treasury and LIBOR rates. The net income simulations also demonstrate projected changes in MSR and MSR hedging activity under a variety of scenarios. Additionally, management projects the fair market values of assets and liabilities under different interest rate scenarios to assess their risk exposure over longer periods of time.

The projection of the sensitivity of net interest income and net income requires numerous assumptions. Prepayment speeds, decay rates (the estimated runoff of deposit accounts that do not have a stated maturity), future deposit and loan rates and loan and deposit volume and mix projections are among the most significant assumptions. Prepayments affect the size of the loan and mortgage-backed securities portfolios, which impacts net interest income. All deposit and loan portfolio assumptions, including loan prepayment speeds and deposit decay rates, require management’s judgments of anticipated customer behavior in various interest rate environments. These assumptions are derived from internal and external

53




analyses. The rates on new investment securities and borrowings are estimated based on market rates while the rates on deposits and loans are estimated based on the rates offered by the Company to retail customers.

The slope of the yield curve, current interest rate conditions and the speed of changes in interest rates all affect sensitivity to changes in interest rates. Short-term borrowings and, to a lesser extent, interest-bearing deposits typically reprice faster than the Company’s adjustable-rate assets. This lag effect is inherent in adjustable-rate loans and mortgage-backed securities indexed to the 12-month average of the annual yields on actively traded U.S. Treasury securities adjusted to a constant maturity of one year and those indexed to the 11th District FHLB monthly weighted average cost of funds index.

The sensitivity of new loan volume and mix to changes in market interest rate levels is also projected. Management generally assumes a reduction in total loan production in rising long-term interest rate scenarios accompanied by a shift towards a greater proportion of adjustable-rate production. Conversely, the Company generally assumes an increase in total loan production in falling long-term interest rate scenarios accompanied by a shift towards a greater proportion of fixed-rate loans. The gain from mortgage loans also varies under different interest rate scenarios. Normally, the gain from mortgage loans increases in falling long-term interest rate environments primarily from high fixed-rate mortgage refinancing activity. Conversely, the gain from mortgage loans may decline when long-term interest rates increase if management chooses to retain more loans in the portfolio.

In periods of rising interest rates, the net interest margin normally contracts since the repricing period of the Company’s liabilities is shorter than the repricing period of its assets. The net interest margin generally expands in periods of falling interest rates as borrowing costs reprice downward faster than asset yields.

To manage interest rate sensitivity, management utilizes the interest rate risk characteristics of the balance sheet assets and liabilities to offset each other as much as possible. Balance sheet products have a variety of risk profiles and sensitivities. Some of the components of interest rate risk are countercyclical. Management may adjust the amount or mix of risk management instruments based on the countercyclical behavior of the balance sheet products.

When the countercyclical behavior inherent in portions of the Company’s balance sheet does not result in an acceptable risk profile, management utilizes investment securities and interest rate contracts to mitigate this situation. The interest rate contracts used for this purpose are classified as asset/liability risk management instruments. These contracts are often used to modify the repricing period of interest-bearing funding sources with the intention of reducing the volatility of net interest income. The types of contracts used for this purpose may consist of interest rate swaps, interest rate corridors, interest rate swaptions and certain derivatives that are embedded in borrowings. Management also uses receive-fixed swaps as part of the asset/liability risk management strategy to help modify the repricing characteristics of certain long-term liabilities to match those of the assets. Typically, these are swaps of long-term fixed-rate debt to a short-term adjustable-rate, which more closely resembles asset repricing characteristics.

July 1, 2007 and January 1, 2007 Sensitivity Comparison

The table below indicates the sensitivity of net interest income and net income as a result of hypothetical interest rate movements on market risk sensitive instruments. The base case used for this sensitivity analysis is similar to the Company’s most recent earnings projection for the respective twelve-month periods as of the date the analysis was performed. The comparative results assume parallel shifts in the yield curve with interest rates rising 100 basis points and decreasing 100 basis points in even quarterly increments over the twelve-month periods ending June 30, 2008 and December 31, 2007.

54




These analyses also incorporate assumptions about balance sheet dynamics such as loan and deposit growth and pricing, changes in funding mix and asset and liability repricing and maturity characteristics. The projected interest rate sensitivities of net interest income and net income shown below may differ significantly from actual results, particularly with respect to non-parallel shifts in the yield curve or changes in the spreads between mortgage, Treasury and LIBOR rates.

During the first quarter of 2007, management updated certain loan prepayment speeds, deposit decay rates and deposit pricing assumptions used to model the sensitivity of net interest income and net income. The aforementioned changes increased the sensitivity of net interest income and net income for the one year period beginning January 1, 2007 as compared to those reported in the Company’s 2006 10-K, primarily due to increased sensitivity in the estimated repricing behavior of the affected deposits to changes in interest rates. In June 2007, the Company adopted an OAS valuation methodology to estimate the fair value of substantially all of its MSR asset. For the one year period beginning January 1, 2007, this change did not have a material impact on net interest income sensitivity. The implementation of an OAS valuation methodology resulted in a slight reduction in the January 1, 2007 sensitivity of net income in the  - 100 basis point scenario and a corresponding increase in sensitivity in the +100 basis point scenario. The implementation of the OAS valuation methodology tended to reduce hedging costs in all scenarios. All of the updated assumptions and the adoption of the OAS valuation methodology are reflected in the sensitivity analysis for the one year period beginning July 1, 2007.

Comparative Net Interest Income and Net Income Sensitivity

 

 

Gradual Change in Rates

 

 

 

- 100 basis points

 

+100 basis points

 

Net interest income change for the one year period beginning:

 

 

 

 

 

 

 

 

 

July 1, 2007

 

 

4.15

%

 

 

(3.44

)%

 

January 1, 2007

 

 

4.64

 

 

 

(3.26

)

 

Net income change for the one year period beginning:

 

 

 

 

 

 

 

 

 

July 1, 2007

 

 

4.31

 

 

 

(4.61

)

 

January 1, 2007

 

 

3.42

 

 

 

(3.32

)

 

 

The Treasury and swap curves in the July 1, 2007 income sensitivity analyses were generally upward sloping compared to the flat to inverted yield curve at December 31, 2006. Short-term rates have held relatively constant since December 31, 2006 while long-term rates have increased. The slightly more favorable interest rate environment for the period beginning July 1, 2007 tended to enhance the net interest margin in all scenarios.

Net interest income was projected to increase in the - 100 basis point scenario primarily due to the projected expansion of the net interest margin. Net income was projected to increase although the favorable impact of net interest income was partially offset by adverse changes in other income in this scenario.

Net interest income was projected to decrease in the +100 basis point scenario mainly due to the projected contraction of the net interest margin. Compared with the analysis as of December 31, 2006, the increase in other income offset the decrease in net interest income to a lesser extent. Overall, net income declined in this scenario largely due to the adverse impact of net interest income.

These sensitivity analyses are limited in that they were performed at a particular point in time. The analyses assume management does not initiate additional strategic actions, such as increasing or decreasing term funding or selling assets, to offset the impact of projected changes in net interest income or net income in these scenarios. The analyses are also dependent on the reliability of various assumptions used, including prepayment forecasts and discount rates, and do not incorporate other factors that would impact the Company’s overall financial performance in such scenarios, most significantly the impact of changes in

55




gain from mortgage loans that result from changes in interest rates. These analyses also assume that the projected MSR risk management strategy is effectively implemented and that mortgage and interest rate swap spreads are constant in all interest rate environments. These assumptions may not be realized. For example, changes in spreads between interest rate indices could result in significant changes in projected net income sensitivity. Projected net income may increase if market rates on interest rate swaps decrease by more than the decrease in mortgage rates, while the projected net income may decline if the rates on swaps increase by more than mortgage rates. Accordingly, the preceding sensitivity estimates should not be viewed as an earnings forecast.

Operational Risk Management

Operational risk is the risk of loss resulting from human fallibility, inadequate or failed internal processes and systems, or from external events, including loss related to legal risk. Operational risk can occur in any activity, function, or unit of the Company.

Primary responsibility for managing operational risk rests with the lines of business. Each line of business is responsible for identifying its operational risks and establishing and maintaining appropriate business-specific policies, internal control procedures, and tools to quantify and monitor these risks. To help identify, assess and manage corporate-wide risks, the Company uses corporate support groups such as Legal, Compliance, Information Security, Continuity Assurance, Strategic Sourcing and Finance. These groups assist the lines of business in the development and implementation of risk management practices specific to the needs of each business.

The Operational Risk Management Policy, approved by the Audit Committee of the Board of Directors, establishes the Company’s operational risk framework and defines the roles and responsibilities for the management of operational risk. The operational risk framework consists of a methodology for identifying, measuring, monitoring and controlling operational risk combined with a governance process that complements the Company’s organizational structure and risk management philosophy. The Operational Risk Management Committee ensures consistent communication and oversight of significant operational risk issues across the Company and ensures sufficient resources are allocated to maintain business-specific operational risk controls, policies and practices consistent with and in support of the operational risk framework and corporate standards.

The Operational Risk Management function, part of Enterprise Risk Management, is responsible for maintaining the framework and works with the lines of business and corporate support functions to ensure consistent and effective policies, practices, controls and monitoring tools for assessing and managing operational risk across the Company. The objective of the framework is to provide an integrated risk management approach that emphasizes proactive management of operational risk using measures, tools and techniques that are risk-focused and consistently applied company-wide. These tools are used to determine the Company’s operational risk profile and to define appropriate risk mitigation measures and priorities.

The Company has a process for identifying and monitoring operational loss data, thereby permitting root cause analysis and monitoring of trends by line of business, process, product and risk type. This analysis is essential to sound risk management and supports the Company’s process management and improvement efforts.

56




PART II  – OTHER INFORMATION

Item 1.  Legal Proceedings

In the ordinary course of business, the Company and its subsidiaries are routinely defendants in or parties to a number of pending and threatened legal actions and proceedings, including actions brought on behalf of various classes of claimants. In certain of these actions and proceedings, claims for substantial monetary damages are asserted against the Company and its subsidiaries. Certain of these actions and proceedings are based on alleged violations of consumer protection, banking and other laws.

In July 2004, the Company and a number of its officers were named as defendants in a series of cases alleging violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange Act”), Rule 10b-5 thereunder and Section 20(a) of the Exchange Act. By stipulation, those cases were consolidated into a single case currently pending in the U.S. District Court for the Western Division of Washington. South Ferry L.P. #2 v. Killinger et al. , No. CV04-1599C (W.D. Wa., Filed Jul. 19, 2004) (the “Securities Action”). In brief, the plaintiffs in the Securities Action allege, on behalf of a putative class of purchasers of Washington Mutual, Inc., securities from April 15, 2003 through June 28, 2004, that in various public statements the defendants purportedly made misrepresentations and failed to disclose material facts concerning, among other things, alleged internal systems problems and hedging issues.

The defendants moved to dismiss the Securities Action on May 17, 2005. After briefing, but without oral argument, the Court on November 17, 2005 denied the motion in principal part; however, the Court dismissed the claims against certain of the individual defendants, dismissed claims pleaded on behalf of sellers of put options on Washington Mutual stock, and concluded that the plaintiffs could not rely on supposed violations of accounting standards to support their claims. The remaining defendants subsequently moved for reconsideration or, in the alternative, certification of the opinion for interlocutory appeal to the United States Court of Appeals for the Ninth Circuit. The District Court denied the motion for reconsideration, but on March 6, 2006 granted the motion for certification.

The defendants thereafter moved the Ninth Circuit to have the Appellate Court accept the case for interlocutory review of the District Court’s original order denying the motion to dismiss. On June 9, 2006, the Ninth Circuit granted the defendants’ motion indicating that the Court will hear the merits of the defendants’ appeal. The defendants filed their initial brief on September 25, 2006. Pursuant to an updated, stipulated briefing schedule, the plaintiffs filed their responsive brief on January 10, 2007, and the defendants filed their reply on March 12, 2007. Oral argument has not yet been scheduled.

On November 29, 2005, 12 days after the Court denied the motion to dismiss the Securities Action, a separate plaintiff filed in Washington State Superior Court a derivative shareholder lawsuit purportedly asserting claims for the benefit of the Company. The case was removed to federal court where it is now pending. Lee Family Investments, by and through its Trustee W.B. Lee, Derivatively and on behalf of Nominal Defendant Washington Mutual, Inc. v. Killinger et al. , No. CV05-2121C (W.D. Wa., Filed Nov. 29, 2005) (the “Derivative Action”). The defendants in the Derivative Action include those individuals remaining as defendants in the Securities Action as well as those of the Company’s current independent directors who were directors at any time from April 15, 2003 through June 2004. The allegations in the Derivative Action mirror those in the Securities Action, but seek relief based on claims that the independent director defendants failed properly to respond to the misrepresentations alleged in the Securities Action and that the filing of that action has caused the Company to expend sums to defend itself and the individual defendants and to conduct internal investigations related to the underlying claims. At the end of February 2006, the parties submitted a stipulation to the Court that the matter be stayed pending the outcome of the Securities Action. On March 2, 2006, the Court entered an Order pursuant to that stipulation, staying the Derivative Action in its entirety.

57




Refer to Note 14 to the Consolidated Financial Statements – “Commitments, Guarantees and Contingencies” in the Company’s 2006 Annual Report on Form 10-K for a further discussion of pending and threatened litigation action and proceedings against the Company.

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

The table below displays share repurchases made by the Company for the quarter ended June 30, 2007. Management may engage in future share repurchases as liquidity conditions permit and market conditions warrant.

Issuer Purchases of Equity Securities

 

 

 

Total
Number
of Shares
(or Units)
Purchased
(1)

 

Average
Price Paid
per Share
(or Unit)

 

Total
Number of
Shares (or Units)
Purchased as
Part of Publicly
Announced
Plans or
Programs
(2)

 

Maximum
Number
of Shares
(or Units) that
May Yet Be
Purchased
Under the Plans
or Programs

 

April 2, 2007 to April 30, 2007

 

5,648

 

 

$

41.85

 

 

 

 

 

 

68,187,098

 

 

May 1, 2007 to May 31, 2007

 

13,507,194

 

 

45.33

 

 

 

13,502,706

 

 

 

54,684,392

 

 

June 1, 2007 to June 29, 2007

 

11,215

 

 

42.96

 

 

 

 

 

 

54,684,392

 

 

Total

 

13,524,057

 

 

45.33

 

 

 

13,502,706

 

 

 

54,684,392

 

 


(1)                  In addition to shares repurchased pursuant to the Company’s publicly announced repurchase program, this column includes shares acquired under equity compensation arrangements with the Company’s employees and directors.

(2)                  Effective July 18, 2006, the Company adopted a share repurchase program approved by the Board of Directors (the “2006 Program”). Under the 2006 Program, the Company was authorized to repurchase up to 150 million shares of its common stock as conditions warrant and had repurchased 95,315,608 shares under this program as of June 30, 2007.

For a discussion regarding working capital requirements and dividend restrictions applicable to the Company’s banking subsidiaries, refer to the Company’s 2006 Annual Report on Form 10-K, “Business – Regulation and Supervision” and Note 19 to the Consolidated Financial Statements – “Regulatory Capital Requirements and Dividend Restrictions.”

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

Washington Mutual, Inc. held its annual meeting of shareholders on April 17, 2007. A brief description of each matter voted on and the results of the shareholder voting are set forth below:

 

 

 

For

 

Withhold

 

1.

 

The election of thirteen directors set forth below:

 

 

 

 

 

 

 

Anne V. Farrell

 

706,747,951

 

14,186,140

 

 

 

Stephen E. Frank

 

706,230,373

 

14,703,718

 

 

 

Kerry K. Killinger

 

707,208,231

 

13,725,860

 

 

 

Thomas C. Leppert

 

710,772,113

 

10,161,978

 

 

 

Charles M. Lillis

 

706,700,374

 

14,233,717

 

 

 

Phillip D. Matthews

 

706,268,577

 

14,665,514

 

 

 

Regina T. Montoya

 

710,434,444

 

10,499,647

 

 

 

Michael K. Murphy

 

707,269,769

 

13,664,322

 

 

 

Margaret Osmer McQuade

 

709,819,338

 

11,114,753

 

 

 

Mary E. Pugh

 

664,625,151

 

56,308,940

 

 

 

William G. Reed, Jr.

 

703,694,967

 

17,239,124

 

 

 

Orin C. Smith

 

710,930,938

 

10,003,153

 

 

 

James H. Stever

 

706,412,760

 

14,521,331

 

 

58




 

 

 

 

For

 

Against

 

Abstain

 

2.

 

Ratification of the appointment of Deloitte & Touche LLP as the Company’s independent auditor for 2007

 

709,882,232

 

5,502,012

 

5,549,846

 

 

 

 

 

For

 

Against

 

Abstain

 

Broker
Non-Votes

 

3.

 

Shareholder proposal relating to the Company’s executive retirement plan policies

 

145,085,583

 

428,423,362

 

10,196,523

 

137,228,622

 

 

 

 

 

For

 

Against

 

Abstain

 

Broker
Non-Votes

 

4.

 

Shareholder proposal relating to the Company’s director election process

 

251,273,209

 

324,454,044

 

7,978,150

 

137,228,687

 

 

Item 6.  Exhibits

(a) Exhibits

See Index of Exhibits on page 61.

59




SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on August 9, 2007.

 

WASHINGTON MUTUAL, INC.

By:

 

/s/ THOMAS W. CASEY

 

 

Thomas W. Casey
Executive Vice President and Chief Financial Officer

By:

 

/s/ MELISSA J. BALLENGER

 

 

Melissa J. Ballenger
Senior Vice President and Controller
(Principal Accounting Officer)

 

60




WASHINGTON MUTUAL, INC.
INDEX OF EXHIBITS

Exhibit No.

 

 

3.1

 

Amended and Restated Articles of Incorporation of the Company, as amended (Filed herewith).

3.2

 

Restated Bylaws of the Company as amended (Incorporated by reference to the Company’s Annual Report on Form 10-K filed March 1, 2007. File No. 001-14667).

4.1

 

The Company will furnish upon request copies of all instruments defining the rights of holders of long-term debt instruments of the Company and its consolidated subsidiaries.

31.1

 

Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith).

31.2

 

Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith).

32.1

 

Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished herewith).

32.2

 

Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Furnished herewith).

99.1

 

Computation of Ratios of Earnings to Fixed Charges (Filed herewith).

99.2

 

Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends (Filed herewith).

 

61



Exhibit 3.1

UNITED STATES OF AMERICA

Secretary of State

I, Sam Reed, Secretary of State of the State of Washington and custodian of its seal, hereby issue this

certificate that the attached is a true and correct copy of

ARTICLES OF AMENDMENT

of

WASHINGTON MUTUAL, INC.

as filed in this office on May 23, 2007.

 

 

Date: May 23, 2007

 

 

 

 

 

 

 

 

 

 

 

 

 

Given under my hand and the Seal of the State
of Washington at Olympia, the State Capital

 

 

 

 

 

 

 

 

/s/ Sam Reed

 

 

 

Sam Reed, Secretary of State

 

 

 

 

 

 

 




 

FILED
SECRETARY OF STATE

MAY 23 2007

STATE OF WASHINGTON

 

 

ARTICLES OF AMENDMENT

OF

WASHINGTON MUTUAL, INC.

(Series M Perpetual Non-cumulative Fixed-to-Floating Rate Preferred Stock)

Pursuant to the provisions of Chapter 23B.10 and Section 23B.06.020 of the Revised Code of Washington, the undersigned officer of Washington Mutual, Inc. (the “Company”), a corporation organized and existing under the laws of the State of Washington, does hereby submit for filing these Articles of Amendment to the Company’s Amended and Restated Articles of Incorporation:

FIRST: The name of the Company is Washington Mutual, Inc.

SECOND: 500 shares of the authorized preferred stock of the Company are hereby designated “Series M Perpetual Non-cumulative Fixed-to-Floating Rate Preferred Stock”.

The preferences, limitations, voting powers and relative rights of the Series M Perpetual Non-cumulative Fixed-to-Floating Rate Preferred Stock are as follows:

DESIGNATION

Section 1.        Designation . There is hereby created out of the authorized and unissued shares of preferred stock of the Company a series of preferred stock designated as the “Series M Perpetual Non-cumulative Fixed-to-Floating Rate Preferred Stock” (the “Series M Preferred Stock”). The number of shares constituting such series shall be 500. The Series M Preferred Stock shall have no par value per share and the liquidation preference of the Series M Preferred Stock shall be $1,000,000.00 per share. Shares of the Series M Preferred Stock shall be issued if and only if a Conditional Exchange occurs.

Section 2.        Ranking .

The Series M Preferred Stock will, with respect to dividend rights and rights on liquidation, winding-up and dissolution, rank (i) on a parity with the Company’s Series I Perpetual Non-cumulative Fixed-to-Floating Rate Preferred Stock (the “Series I Preferred Stock”), the Company’s Series J Perpetual Non-cumulative Fixed Rate Preferred Stock (the “Series J Preferred Stock”), the Company’s Series K Perpetual Non-Cumulative Floating Rate Preferred Stock (the “Series K Preferred Stock”), the Company’s Series L Perpetual Non-cumulative Fixed-to-Floating Rate Preferred Stock (the “Series L Preferred Stock”) and with each other class or series of preferred stock established after the Designation Date by the Company the terms of which expressly provide that such class or series will rank on a parity with the Series M Preferred Stock as to dividend rights and rights on liquidation, winding-up and dissolution of the Company (collectively referred to as “Parity Securities”) and (ii) senior to the Company’s common stock (the “Common Stock”), the Company’s Series RP Preferred Stock and each other class of capital stock outstanding or established after the Designation Date by the Company the terms of which do not expressly provide that it ranks on a parity with or senior




to the Series M Preferred Stock as to dividend rights and rights on liquidation, winding-up and dissolution of the Company (collectively referred to as “Junior Securities”). The Company has the right to authorize and/or issue additional shares or series of Junior Securities and Parity Securities without the consent of the holders of the Series M Preferred Stock.

Section 3.        Definitions . Unless the context or use indicates another meaning or intent, the following terms shall have the following meanings, whether used in the singular or the plural:

(a)         “3-Month USD LIBOR” means, with respect to any Dividend Period, a rate determined on the basis of the offered rates for three-month U.S. dollar deposits of not less than a principal amount equal to that which is representative for a single transaction in such market at such time, commencing on the first day of such Dividend Period, which appears on Reuters Screen LIBOR01 Page as of approximately 11:00 a.m., London time, on the LIBOR Determination Date for such Dividend Period. If on any LIBOR Determination Date no rate appears on Reuters Screen LIBOR01 Page as of approximately 11:00 a.m., London time, the Company or an affiliate of the Company on behalf of the Company will on such LIBOR Determination Date request four major reference banks in the London interbank market selected by the Company to provide the Company with a quotation of the rate at which three-month deposits in U.S. dollars, commencing on the first day of such Dividend Period, are offered by them to prime banks in the London interbank market as of approximately 11:00 a.m., London time, on such LIBOR Determination Date and in a principal amount equal to that which is representative for a single transaction in such market at such time. If at least two such quotations are provided, 3-Month USD LIBOR for such Dividend Period will be the arithmetic mean (rounded upward if necessary to the nearest .00001 of 1%) of such quotations as calculated by the Company. If fewer than two quotations are provided, 3-Month USD LIBOR for such Dividend Period will be the arithmetic mean (rounded upward if necessary to the nearest .00001 of 1%) of the rates quoted as of approximately 11:00 am., New York time, on the first day of such Dividend Period by three major banks in New York City, New York selected by the Company for loans in U.S. dollars to leading European banks, for a three-month period commencing on the first day of such Dividend Period and in a principal amount of not less than $1,000,000.

(b)         “ Business Day ” means any day other than a Saturday, Sunday or any other day on which banks in New York City, New York, or Seattle, Washington are generally required or authorized by law to be closed.

(c)         “ Common Stock ” has the meaning set forth in Section 2.

(d)         “ Company ” means Washington Mutual, Inc., a Washington corporation.

(e)         “ Comparable Treasury Issue ” means the United States Treasury security selected by the Independent Investment Banker as having a maturity comparable to the term remaining to the Dividend Payment Date in June 2012 that would be utilized, at the time of selection and in accordance with customary financial practice, in pricing new issues of perpetual preferred securities having similar terms as the Series M Preferred Stock with respect to the payment of dividends and distributions of assets upon liquidation, dissolution or winding-up of the issuer of such preferred stock.

2




(f)          “ Comparable Treasury Price ” means with respect to any Redemption Date the average of the Reference Treasury Dealer Quotations for such Redemption Date, after excluding the highest and lowest of such Reference Treasury Dealer Quotations, or if the Independent Investment Banker obtains fewer than five such Reference Treasury Dealer Quotations, the average of all such quotations.

(g)         “ Conditional Exchange ” means the automatic exchange of the Trust Securities into depositary shares representing an interest in the Series M Preferred Stock which occurs upon the written direction of the OTS upon or after the occurrence of an Exchange Event.

(h)         “ Delaware Preferred Securities ” means the Fixed-to-Floating Rate Perpetual Non-cumulative Preferred Securities, Series 2007-A, liquidation preference $1,000 per security, issued or to be issued by Washington Mutual Preferred Funding LLC, a Delaware limited liability company.

(i)          “ Designation Date ” means May 24, 2007.

(j)          “ Dividend Payment Date ” has the meaning set forth in Section 4(b).

(k)         “ Dividend Period ” has the meaning set forth in Section 4(b).

(l)          “ Exchange Event ” means the occurrence of any one of the following at a time as the Trust Securities are issued and outstanding:

(i)        WMB becomes undercapitalized under the Prompt Corrective Action Regulations;

(ii)       WMB is placed into conservatorship or receivership; or

(iii)      the OTS, in its sole discretion, directs an exchange of the Trust Securities into depositary shares representing an interest in the Series M Preferred Stock in anticipation of WMB becoming undercapitalized under the Prompt Corrective Action Regulations or of the OTS taking any supervisory action that limits the payment of dividends by WMB.

(m)        “ Five-Year Date ” means the Dividend Payment Date in June 2012, and the Dividend Payment Date of each fifth succeeding year (i.e., June 2017, June 2022, etc.) assuming in each case that the Series M Preferred Stock has been issued.

(n)         “ Independent Investment Banker ” means an independent investment banking institution of national standing appointed by the Company.

(o)         “ Junior Securities ” has the meaning set forth in Section 2.

(p)         “ LIBOR Business Day ” means any day on which commercial banks are open for general business (including dealings in deposits in U.S. dollars) in London.

(q)         “ LIBOR Determination Date ” means, as to each Dividend Period, the date that is two LIBOR Business Days prior to the first day of such Dividend Period.

3




(r)          “ OTS ” means the Office of Thrift Supervision or any successor regulatory entity.

(s)         “ Parity Securities ” has the meaning set forth in Section 2.

(t)          “ Primary Treasury Dealer ” has the meaning set forth in Section 3(y).

(u)         “ Prompt Corrective Action Regulation ” means 12 C.F.R. Part 565 as in effect from time to time, or any successor regulation.

(v)         “ Rating Agencies ” means, at any time, Standard & Poor’s Rating Services, a Division of the McGraw-Hill Companies, Inc., Moody’s Investors Service, Inc. and Fitch, Inc., but only in the case of each such agency if it is rating the relevant security, including the Delaware Preferred Securities at the relevant time or, if none of them is providing a rating for the relevant security, including the Delaware Preferred Securities at such time, then any “ nationally recognized statistical rating organization as that phrase is defined for purposes of Rule 436(g)(2) under the Securities Act of 1933, as amended, which is rating such relevant security.

(w)        A “Rating Agency Event ” occurs when the Company reasonably determines that an amendment, clarification or change has occurred in the equity criteria for securities such as the Delaware Preferred Securities of any Rating Agency that then publishes a rating for the Company which amendment, clarification or change results in a lower equity credit for the Company than the respective equity credit assigned by such Rating Agency to the Delaware Preferred Securities on the Designation Date.

(x)          “ Redemption Date ” means any date that is designated by the Company in a notice of redemption delivered pursuant to Section 7.

(y)         “ Reference Treasury Dealer ” means each of the three primary U.S. government securities dealers (each, a “ Primary Treasury Dealer ”), as specified by the Company; provided that if any Primary Treasury Dealer as specified by the Company ceases to be a Primary Treasury Dealer, the Company will substitute for such Primary Treasury Dealer another Primary Treasury Dealer and if the Company fails to select a substitute within a reasonable period of time, then the substitute will be a Primary Treasury Dealer selected by the Independent Investment Banker after consultation with the Company.

(z)          “ Reference Treasury Dealer Quotations ” means, with respect to the Reference Treasury Dealer and any Redemption Date, the average, as determined by the Independent Investment Banker, of the bid and asked prices for the Comparable Treasury Issue (expressed, in each case, as a percentage of its principal amount) quoted in writing to the Independent Investment Banker by such Reference Treasury Dealer at 5:00 p.m., New York City time, on the third Business Day preceding such Redemption Date.

(aa)       A “ Regulatory Capital Event ” occurs when the Company determines, based upon receipt of an opinion of counsel, that there is a significant risk that the Delaware Preferred Securities will no longer constitute core capital of WMB for purposes of the capital adequacy regulations issued by the OTS as a result of a change in applicable laws, regulations or related interpretations after issuance of the Delaware Preferred Securities.

4




(bb)       “ Reuters Screen LIBOR01 Page ” means the display so designated on the Reuters 3000 Xtra (or such other page as may replace that page on that service, or such other service as may be nominated as the information vendor, for the purpose of displaying rates comparable to the London Interbank Offered rate for U.S. dollar deposits).

(cc)       “ Series I Preferred Stock ” has the meaning set forth in Section 2.

(dd)       “ Series J Preferred Stock ” has the meaning set forth in Section 2.

(ee)       “ Series K Preferred Stock ” has the meaning set forth in Section 2.

(ff)         “ Series L Preferred Stock ” has the meaning set forth in Section 2.

(gg)       “ Series M Preferred Stock ” has the meaning set forth in Section 1.

(hh)       “ Treasury Rate ” means the rate per year equal to the quarterly equivalent yield to maturity of the Comparable Treasury Issue, calculated using a price for the Comparable Treasury Issue (expressed as a percentage of its principal amount) equal to the Comparable Treasury Price for the relevant Redemption Date. The Treasury Rate will be calculated on the third Business Day preceding the relevant Redemption Date.

(ii)         “ Trust Securities ” means the Fixed-to-Floating Rate Perpetual Non-cumulative Trust Securities, liquidation preference $100,000 per security, issued by Washington Mutual Preferred Funding Trust III, a Delaware statutory trust.

(jj)         “ Voting Parity Securities ” has the meaning set forth in Section 8(b).

(kk)       “ WMB ” means Washington Mutual Bank, a federal savings association and a subsidiary of the Company, or its successor.

Section 4.        Dividends .

(a)        Holders of shares of Series M Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors, out of the funds legally available therefor, non-cumulative cash dividends in the amount determined as set forth in Section 4(c), and no more.

(b)        Subject to Section 4(a), dividends shall be payable in arrears on March 15, June 15, September 15 and December 15 of each year commencing on the first such day after the issuance of the Series M Preferred Stock or, in each case, if any such day is not a Business Day, the next Business Day (each, a “Dividend Payment Date”). Each dividend will be payable to holders of record as they appear on the stock books of the Company on the first day of the month in which the relevant Dividend Payment Date occurs or, if such date is not a Business Day, the first Business Day of such month. Each period from and including a Dividend Payment Date (or the date of the issuance of the Series M Preferred Stock) to but excluding the following Dividend Payment Date (or the Redemption Date) is herein referred to as “Dividend Period”, except that, if the Series M Preferred Stock is outstanding on June 15, 2012, the Dividend Period ending in June 2012 shall be to but excluding June 15, 2012 (whether or not a Business Day) and the Dividend Period ending in September 2012 shall commence on June 15, 2012 (whether or not a Business Day).

5




(c)        If the date of issuance of the Series M Preferred Stock is prior to the day immediately preceding June 15, 2012, or if June 15, 2012 is not a Business Day, the first Business Day after June 15, 2012, then from such date of issuance to but not including June 15, 2012 (whether or not a Business Day); dividends, if, when and as declared by the Board of Directors, will be, for each outstanding share of Series M Preferred Stock, at an annual rate of 6.895% on the per share liquidation preference of the Series M Preferred Stock. From the later of the (i) June 15, 2012 and (ii) the date of issuance of the Series M Preferred Stock, dividends, if, when and as declared by the Board of Directors, will be, for each outstanding share of Series M Preferred Stock, at an annual rate on the per share liquidation preference of the Series M Preferred Stock equal to 3-Month USD LIBOR for the related Dividend Period plus 1.755%. Dividends payable for any Dividend Period greater or less than a full Dividend Period will be computed on the basis of twelve 30-day months, a 360-day year, and the actual number of days elapsed in the period if such Dividend Period ends in or prior to June 2012; thereafter dividends payable for any period greater or less than a full dividend period will be computed on the basis of the actual number of days in the relevant period divided by 360. No interest will be paid on any dividend payment of the Series M Preferred Stock.

(d)        Dividends on the Series M Preferred Stock are non-cumulative. If the Board of Directors does not declare a dividend on the Series M Preferred Stock or declares less than a full dividend in respect of any Dividend Period, the holders of the Series M Preferred Stock will have no right to receive any dividend or a full dividend, as the case may be, for the Dividend Period, and the Company will have no obligation to pay a dividend or to pay full dividends for that Dividend Period, whether or not dividends are declared and paid for any future Dividend Period with respect to the Series M Preferred Stock or the Common Stock or any other class or series of the Company’s preferred stock.

(e)        If full dividends on all outstanding shares of the Series M Preferred Stock for any Dividend Period have not been declared and paid, the Company shall not declare or pay dividends with respect to, or redeem, purchase or acquire any of, its equity capital securities during the next succeeding Dividend Period, except dividends in connection with the Series RP Preferred Stock or other shareholders’ rights plan, if any, or dividends in connection with benefit plans.

Section 5.        Liquidation .

(a)        In the event the Company voluntarily or involuntarily liquidates, dissolves or winds up, the holders of Series M Preferred Stock at the time outstanding shall be entitled to receive liquidating distributions in the amount of $1,000,000 per share of Series M Preferred Stock, plus an amount equal to any declared but unpaid dividends thereon for the current Dividend Period to and including the date of such liquidation, out of assets legally available for distribution to its shareholders, before any distribution of assets is made to the holders of Common Stock or any securities ranking junior to the Series M Preferred Stock. After payment of the full amount of such liquidating distributions, the holders of Series M Preferred Stock will not be entitled to any further participation in any distribution of assets by, and shall have no right or claim to any remaining assets of, the Company.

(b)        In the event the assets of the Company available for distribution to shareholders upon any liquidation, dissolution or winding-up of the affairs of the Company, whether voluntary or involuntary, shall be insufficient to pay in full the amounts payable with respect to all outstanding shares of the Series M Preferred Stock and the corresponding

6




amounts payable on any other Securities of equal ranking, the holders of Series M Preferred Stock and the holders of such other securities of equal ranking shall share ratably in any distribution of assets of the Company in proportion to the full respective liquidating distributions to which they would otherwise be respectively entitled.

Section 6.        Maturity . The Series M Preferred Stock shall be perpetual unless redeemed by the Company in accordance with Section 7.

Section 7.        Redemptions .

(a)       The Series M Preferred Stock shall not be redeemable at the option of the holders at any time.

(b)        The Series M Preferred Stock shall be redeemable at the option of the Company in any of the following circumstances:

(i)         in whole but not in part, prior to the Dividend Payment Date in June, 2012 upon the occurrence of a Regulatory Capital Event or a Rating Agency Event, at a cash redemption price equal to the sum of:

(A)       the greater of:

(1)   $1,000,000 per share of Series M Preferred Stock and

(2)   The sum of the present value of $1,000,000 per share of Series M Preferred Stock, discounted from the Dividend Payment Date in June, 2012 to the redemption date, and the present values of all undeclared dividends for each Dividend Period from the redemption date to and including the Dividend Payment Date in June, 2012 discounted from their applicable Dividend Payment Dates to the redemption date, in each case on a quarterly basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate, as calculated by an Independent Investment Banker, plus 0.50%; plus

(B)        any declared but unpaid dividends to the redemption date;

(ii)         in whole but not in part, on any Dividend Payment Date prior to the Dividend Payment Date in June, 2012 for any reason other than the occurrence of a Rating Agency Event or a Regulatory Capital Event, at a cash redemption price equal to:

(A)       the greater of:

(1)   $1,000,000 per share of Series M Preferred Stock, or

(2)   the sum of the present value of $1,000,000 per share of Series M Preferred Stock discounted from the Dividend Payment Date in June, 2012 to the redemption date, and the present values of all undeclared dividends for the Dividend Periods from the redemption date to and including the Dividend Payment Date in June, 2012, discounted from their applicable Dividend Payment Dates to the redemption date, in each case

7




on a quarterly basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate, as calculated by an Independent Investment Banker, plus 0.35%; plus

(B)        any declared but unpaid dividends to the redemption date;

(iii)             in whole but not in part, on any Dividend Payment Date after the Dividend Payment Date in June, 2012 that is not a Five-Year Date, upon the occurrence of a Regulatory Capital Event or a Rating Agency Event, at a cash redemption price equal to $1,000,000 per share of Series M Preferred Stock, plus any declared and unpaid dividends to the redemption date;

(iv)            in whole or in part, on each Dividend Payment Date that is a Five-Year Date, at a cash redemption price of $1,000,000 per share of Series M Preferred Stock, plus any declared and unpaid dividends to the redemption date; and

(v)             in whole but not in part, on any Dividend Payment Date after the Dividend Payment Date in June, 2012 that is not a Five-Year Date for any reason other than the occurrence of a Rating Agency Event or a Regulatory Capital Event, at a cash redemption price equal to:

(A)       the greater of:

(1)     $1,000,000 per share of Series M Preferred Stock, or

(2)     the sum of the present value of $1,000,000 per share of Series M Preferred Stock, discounted from the next succeeding Five-Year Date to the redemption date, and the present values of all undeclared dividends for the Dividend Periods from the redemption date to and including the next succeeding Five-Year Date, discounted from their applicable Dividend Payment Dates to the redemption date, in each case on a quarterly basis (assuming a 360-day year consisting of twelve 30-day months) at the 3-month USD LIBOR Rate applicable to the Dividend Period immediately preceding such redemption date (which 3-month USD LIBOR Rate will also, for the purposes of calculating such redemption price, be the rate used in calculating the amount for each undeclared dividend), as calculated by an Independent Investment Banker; plus

(B)        any declared but unpaid dividends to the redemption date;

in each case, without accumulation of any undeclared dividends with respect to Dividend Payment Dates prior to the redemption date.

(c)         Dividends will cease to accrue on the Series M Preferred Stock called for redemption on and as of the date fixed for redemption and such Series M Preferred Stock will be deemed to cease to be outstanding, provided that the redemption price, including any authorized and declared but unpaid dividends for the current Dividend Period, if any, to the date fixed for redemption, has been duly paid or provision has been made for such payment.

(d)         In the case of any redemption under this Section 7, notice shall be mailed to each holder of record of the Series M Preferred Stock, not less than 30 nor more than 60 days prior to the Redemption Date specified in such notice; provided, however, that a longer minimum notice may be agreed to by the Company, including in a deposit agreement relating to

8




depositary shares representing interests in the Series M Preferred Stock. The notice of redemption shall include a statement of (i) the redemption date, (ii) the redemption price, and (iii) the number of shares to be redeemed.

(e)         Any shares of Series M Preferred Stock redeemed pursuant to this Section 7 or otherwise acquired by the Company in any manner whatsoever shall become authorized but unissued preferred shares of the Company but such preferred shares shall not under any circumstances be reissued as Series M Preferred Shares. The Company shall from time-to-time take such appropriate action as may be necessary to reduce the authorized number of shares of Series M Preferred Stock accordingly.

Section 8.        Voting Rights .

(a)        Holders of the Series M Preferred Stock will not have any voting rights, including the right to elect any directors, except (i) voting rights, if any, required by law, and (ii) voting rights, if any, described in this Section 8.

(b)        Holders of the Series M Preferred Stock will in the circumstances to the extent set forth in this Section 8(b), have the right to elect two directors.

(i)          If after the issuance of the Series M Preferred Stock the Company fails to pay, or declare and set aside for payment, full dividends on the Series M Preferred Stock or any other class or series of Parity Securities having similar voting rights (“Voting Parity Securities”) for six Dividend Periods or their equivalent, the authorized number of the Company’s directors will be increased by two. Subject to compliance with any requirement for regulatory approval of, or non-objection to, persons serving as directors, the holders of Series M Preferred Stock, voting together as a single and separate class with the holders of any outstanding Voting Parity Securities, will have the right to elect two directors in addition to the directors then in office at the Company’s next annual meeting of shareholders. This right will continue at each subsequent annual meeting until the Company pays dividends in full on the Series M Preferred Stock and any Voting Parity Securities for three consecutive Dividend Periods or their equivalent and pays or declares and sets aside for payment dividends in full for the fourth consecutive Dividend Period or its equivalent or, if earlier, upon the redemption of all Series M Preferred Stock.

(ii)         The term of such additional directors will terminate, and the total number of directors will be decreased by two, at such time as the Company pays dividends in full on the Series M Preferred Stock and any Voting Parity Securities for three consecutive Dividend Periods or their equivalent and declares and pays or sets aside for payment dividends in full for the fourth consecutive Dividend Period or its equivalent or, if earlier, upon the redemption of all Series M Preferred Stock. After the term of such additional directors terminates, the holders of the Series M Preferred Stock will not be entitled to elect additional directors unless full dividends on the Series M Preferred Stock have again not been paid or declared and set aside for payment for six future Dividend Periods.

(iii)        Any additional director elected by the holders of the Series M Preferred Stock and the Voting Parity Securities may only be removed by the vote of the holders of record of the outstanding Series M Preferred Stock and Voting Parity Securities, voting together as a single and separate class, at a meeting of the Company shareholders called for that purpose. Any vacancy created by the removal of any such director may be filled only by the

9




vote of the holders of the outstanding Series M Preferred Stock and Voting Parity Securities, voting together as a single and separate class.

(c)         So long as any shares of Series M Preferred Stock are outstanding, the vote or consent of the holders of at least 66 2/3% of the shares of Series M Preferred Stock at the time outstanding, voting as a class with all other classes and series of Parity Securities upon which like voting rights have been conferred and are exercisable, given in person or by proxy, either in writing without a meeting or by vote at any meeting called for the purpose, will be necessary for effecting or validating any of the following actions, whether or not such approval is required by Washington law:

(i)          any amendment, alteration or repeal of any provision of the Company’s Amended and Restated Articles of Incorporation (including the Articles of Amendment creating the Series M Preferred Stock) or the Company’s bylaws that would alter or change the voting powers, preferences or special rights of the Series M Preferred Stock so as to affect them adversely;

(ii)         any amendment or alteration of the Company’s Amended and Restated Articles of Incorporation to authorize or create, or increase the authorized amount of, any shares of, or any securities convertible into shares of, any class or series of the Company’s capital stock ranking prior to the Series M Preferred Stock in the payment of dividends or in the distribution of assets on any liquidation, dissolution or winding up of the Company; or

(iii)        the consummation of a binding share exchange or reclassification involving the Series M Preferred Stock or a merger or consolidation of the Company with another entity, except that holders of Series M Preferred Stock will have no right to vote under this provision or under §23B.11.035 of the Revised Code of Washington or otherwise under Washington law if in each case (x) the Series M Preferred Stock remains outstanding or, in the case of any such merger or consolidation with respect to which the Company is not the surviving or resulting entity, is converted into or exchanged for preference securities of the surviving or resulting entity or its ultimate parent, and (y) such Series M Preferred Stock remaining outstanding or such preference securities, as the case may be, have such rights, preferences, privileges and voting powers, taken as a whole, as are not materially less favorable to the holders thereof than the rights, preferences, privileges and voting powers of the Series M Preferred Stock, taken as a whole;

provided, however, that any increase in the amount of the authorized or issued Series M Preferred Stock or authorized preferred stock or the creation and issuance, or an increase in the authorized or issued amount, of other series of preferred stock ranking equally with and/or junior to the Series M Preferred Stock with respect to the payment of dividends (whether such dividends are cumulative or non-cumulative) and/or the distribution of assets upon the Company’s liquidation, dissolution or winding up will not be deemed to adversely affect the voting powers, preferences or special rights of the Series M Preferred stock and, notwithstanding §23B. 10.040(1)(a), (e) or (f) of the Revised Code of Washington or any other provision of Washington law, holders of Series M Preferred Stock will have no right to vote on such an increase, creation or issuance.

(d)         If an amendment, alteration, repeal, share exchange, reclassification, merger or consolidation described above would adversely affect one or more but not all series of preferred stock with like voting rights (including the Series M Preferred Stock for this

10




purpose), then only the series affected and entitled to vote shall vote as a class in lieu of all such series of preferred stock.

Section 9.        Certificates . The Company may at its option issue the Series M Preferred Stock without certificates.

THIRD:   This amendment does not provide for an exchange, reclassification or cancellation of any issued shares.

FOURTH:   The date of this amendment’s adoption is May 23, 2007.

FIFTH:   This amendment to the Amended and Restated Articles of Incorporation was duly adopted by the Board of Directors of the Company.

SIXTH:   No shareholder action was required.

11




EXECUTED this 23 rd  day of May, 2007.

 

 

WASHINGTON MUTUAL, INC.

 

 

 

 

 

By:

/s/ Peter Freilinger

 

 

 

Name:

 

Peter Freilinger

 

 

 

Title:

 

SVP

 

12




 

ARTICLES OF AMENDMENT
WASHINGTON
PROFIT CORPORATION
(Per Chapter 238.10 RCW)

 

 

 

·   Please PRINT or TYPE in black ink

·   Sign, date and return original AND ONE COPY to:

CORPORATIONS DIVISION
801 CAPITOL WAY SOUTH
· PO BOX 40234
OLYMPIA, WA 98504-0234

FILED
SECRETARY OF STATE

JUNE 22 2006

STATE OF WASHINGTON

FEE: $30

EXPEDITED (24-HOUR) SERVICE AVAILABLE - $20 PER ENTITY
INCLUDE FEE AND WRITE “EXPEDITE” IN BOLD LETTERS
ON OUTSIDE OF ENVELOPE

 

FOR OFFICE USE ONLY

·   BE SURE TO INCLUDE FILING FEE. Checks
should be made payable to “Secretary of State”

 

FILED:                 /                         /

 

IMPORTANT: Person to contact about this filing

Daytime Phone Number (with area code)

Christopher J. Bellavia

206-490-8597

AMENDMENT TO ARTICLES OF INCORPORATION

NAME OF CORPORATION ( As currently recorded with the Office of the Secretary of State )

Washington Mutual, Inc.

 

UBI NUMBER

CORPORATION NUMBER (If known)

AMENDMENTS TO ARTICLES OF INCORPORATION WERE ADOPTED ON

 

 

 

601566389

 

Date: April 18, 2006

 

 

 

EFFECTIVE DATE OF ARTICLES OF AMENDMENT

(Specified effective date may be up to 30 days AFTER receipt of the document by the Secretary of State)

o   Specific Date:                                                              

x   Upon filing by the Secretary of State

 

 

 

ARTICLES OF AMENDMENT WERE ADOPTED BY (Please check ONE of the following)

 

o         Incorporators. Shareholders action was not required

o         Board of Directors. Shareholders action was not required

x        Duly approved shareholder action in accordance with Chapter 23B.10 RCW

 

AMENDMENTS TO THE ARTICLES OF INCORPORATION ARE AS FOLLOWS
If amendment provides for an exchange, reclassification, or cancellation of issued share, provisions for
implementing the amendment must be included. If necessary, attach additional amendments or information.

 

 

Attached as Exhibit A

 

 

 

SIGNATURE OF OFFICER

 

 

 

 

This document is hereby executed under penalties of perjury, and is, to the best of my knowledge, true and correct.

 

 

 

 

 

/s/ William L. Lynch

 

William L. Lynch

 

5/30/06

Signature of Officer

 

Printed Name

 

Date

INFORMATION AND ASSISTANCE- 360/753-7115 (TDD- 360/753-1485)




EXHIBIT A

Article IV of the Corporation’s Articles of Incorporation shall be replaced in its entirety with the following:

ARTICLE IV

BOARD OF DIRECTORS

The Company shall be managed by a Board of Directors. The number of directors shall be stated in the Company’s Bylaws, provided, however, that such number shall not be less than five (5). The directors elected at any annual meeting of shareholders prior to the 2007 annual meeting of the Company’s shareholders, shall be classified into three classes of elected directors designated as Class 1, Class 2, and Class 3 directors. Each class shall contain one-third of the total number of directors, as near as may be. The terms of the Class 1 directors shall expire at the first annual shareholders’ meeting after their election. The terms of the Class 2 directors shall expire at the second annual shareholders’ meeting after their election. The terms of the Class 3 directors shall expire at the third annual shareholders’ meeting after their election. At each annual meeting of the Company’s shareholders from and after the Company’s annual meeting of shareholders to be held in 2007, the directors shall be elected for terms lasting until the next annual meeting of shareholders following their election, and until their successors are elected and qualified, subject to their earlier death, resignation or removal. A vacancy on the Board of Directors may be filled by the Board in accordance with the applicable provisions of the Company’s Bylaws. A director elected to fill a vacancy shall be elected for a term of office continuing only until the next election of directors by shareholders.




STATE OF WASHINGTON

SECRETARY OF STATE

I, SAM REED, Secretary of State of the State of Washington and custodian of its seal , hereby issue this

CERTIFICATE OF AMENDMENT

to

WASHINGTON MUTUAL, INC.

a Washington Profit corporation. Articles of Amendment were filed for record in this office on the date indicated below.

Amended and Restated Articles

 

 

 

UBI Number: 601 566 389

 

Date: February 08, 2001

 

 

 

 

 

 

 

Given under my hand and the Seal of the State of Washington at Olympia, the State Capital

 

 

 

 

 

/s/ Sam Reed

 

 

Sam Reed, Secretary of State

2-496256-5

 




 

 

FILED
STATE OF WASHINGTON

FEB 08 2001

SECRETARY OF STATE

ARTICLES OF AMENDMENT

TO THE

AMENDED AND RESTATED ARTICLES OF INCORPORATION

OF

WASHINGTON MUTUAL, INC.

Pursuant to the provisions of Chapter 23B.10 and Section 23B.06.020 of the Washington Business Corporation Act, Washington Mutual, Inc., a Washington corporation, hereby adopts the following articles of amendment to its amended and restated articles of incorporation:

FIRST:        The name of the corporation is: Washington Mutual, Inc.

SECOND:    The rights, preferences, privileges, restrictions and other matters relating to the Series H Preferred Stock of the corporation are as follows:

1.       Designation .  The designation of this Series shall be Series H Preferred Stock (hereinafter referred to as this “Series”), and the number of shares constituting this Series shall be 2,000,000. Shares of this Series shall have a liquidation preference of $50.

2.       Dividends .  (a)  The holders of shares of this Series shall be entitled to receive cash dividends, when, as and if declared by the Board of Directors, out of funds legally available for that purpose, at the rates set forth below in this Section 2. Dividends on the shares of this Series shall be payable, when, as and if declared by the Board of Directors, quarterly in arrears on February 16, May 16, August 16 and November 16 of each year (each, a “Dividend Payment Date”), commencing on the Initial Dividend Payment Date. The “Initial Dividend Payment Date” shall mean the first Dividend Payment Date following the effective date of the merger (the “Merger”) of Bank United Corp. with and into the Company, or if any such date is not a Business Day (as defined below), the next succeeding Business Day. Each such dividend shall be paid to the holders of record of shares of this Series as they appear on the stock register of the Company on the applicable Record Date, as shall be fixed by the Board of Directors; provided, however, that holders of shares of this Series called for redemption on a Redemption Date falling between the record date associated with a Dividend Payment Date and such Dividend Payment Date shall receive the applicable dividend payment, together with all other accumulated and unpaid dividends on such date as shall be fixed for redemption. Dividends on the shares of this Series shall accumulate and be cumulative from the date of original issuance. “Business Day” shall mean any day other than a Saturday or Sunday or a day on which banking institutions in New York City are authorized or required by law or executive order to remain closed.




(b)     For each quarterly dividend period (each, a “Dividend Period”) from the Initial Dividend Payment Date, through and including the Dividend Period ending August 16, 2002, dividends payable on the shares of this Series shall be payable at a rate per annum of the liquidation preference thereof equal to 7.25% (the “Initial Rate Period”). For each Dividend Period after the Initial Rate Period, dividends payable on the shares of this Series shall be payable at a rate per annum of the liquidation preference thereof equal to the Reset Rate (as defined below). The amount of dividends per share for each Dividend Period shall be computed by dividing the applicable rate for such Dividend Period by four and applying the resulting rate to the liquidation preference per share of this Series. Each Dividend Period (other than the Initial Dividend Period, defined below) shall commence on a Dividend Payment Date and shall end on and include the day next preceding the next Dividend Payment Date. The “Initial Dividend Period” shall mean the period commencing on the effective date of the Merger and ending on the Initial Dividend Payment Date.

(c)      Dividends payable on this Series for any period greater or less than a full Dividend Period, other than the Initial Dividend Period, shall be computed on the basis of a 360-day year consisting of twelve 30-day months and, for any period less than one month, the actual number of days elapsed in the period. In connection with the Merger, the shares of Bank United Corp.’s Series B Preferred Stock (the “Predecessor Shares”) shall be converted into shares of this Series. Prior to the completion of the Merger, the board of directors of Bank United Corp. declared a dividend on the Predecessor Shares payable on the Initial Dividend Payment Date. As successor to Bank United Corp., the Company will pay on the Initial Dividend Payment Date the dividend declared but not paid on the Predecessor Shares; provided that in no event shall a holder of this Series be entitled to a dividend on the Initial Dividend Payment Date that is greater than such holder would have been entitled to on the Initial Dividend Payment Date had the Merger not been completed and the Predecessor Shares not been converted into shares of this Series.

(d)     No full dividends shall be declared or paid or set apart for payment on the Preferred Stock of any series ranking, as to dividends, on a parity with or junior to this Series for any period unless full cumulative dividends on the shares of this Series for all full Dividend Periods ending on or prior to the date of such dividends on such other series of Preferred Stock have been or contemporaneously are declared and paid or declared and a sum sufficient for the payment thereof set apart for such payment. When dividends are not paid in full, as aforesaid, upon the shares of this Series and any other series of Preferred Stock ranking on a parity as to dividends with this Series, all dividends declared upon shares of this Series and any other series of Preferred Stock ranking on a parity as to dividends with this Series shall be declared pro rata so that the amount of dividends declared per share on this Series and such other Preferred Stock shall in all cases bear to each other the same ratio that accrued and unpaid dividends per share on the shares of this Series and such other Preferred Stock bear to each other. No interest, or sum of money in lieu of interest, shall be payable in respect of any dividend payment or payments on this Series which may be in arrears.




(e)      So long as any shares of this Series are outstanding, no dividend (other than a dividend in Common Stock or in any other stock ranking junior to this Series as to dividends and upon liquidation and other than as provided in paragraph (d) of this Section 2) shall be declared or paid or set aside for payment or other distribution declared or made upon the Common Stock or upon any other stock ranking junior to or on a parity with this Series as to dividends or upon liquidation, nor shall any Common Stock or any other stock of the Company ranking junior to or on a parity with this Series as to dividends or upon liquidation be redeemed, purchased or otherwise acquired for any consideration (or any moneys be paid to or made available for a sinking fund for the redemption of any shares of any such stock) by the Company (except by conversion into or exchange for stock of the Company ranking junior to this Series as to dividends and upon liquidation), unless, in each case, full cumulative dividends on all outstanding shares of this Series for all full Dividend Periods ending on or prior to the date of such other dividend, distribution, redemption, purchase or other acquisition, shall have been or contemporaneously are paid or declared and a sum sufficient for the payment thereof set aside for such payment.

3.       Remarketing .  (a)  The dividend rate on this Series shall be reset to the Reset Rate on the Purchase Contract Settlement Date (as defined below). The Company shall request, not later than 15 nor more than 30 calendar days prior to the Remarketing Date (as defined below), that the Depositary (as defined below) notify the Holders of shares of this Series and the holders of Corporate PIES of the Remarketing and of the procedures that must be followed if a Holder of Corporate PIES wishes to make a cash settlement of its obligation to purchase Common Stock of the Company pursuant to the Purchase Contract Agreement.

(b)     Not later than 5:00 p.m., New York City time, on the seventh Business Day preceding the Purchase Contract Settlement Date, each Holder may elect to have the shares of this Series held by such Holder remarketed in the Remarketing. Holders of Corporate PIES that do not give notice of their intention to make a cash settlement of the purchase contract component of their Corporate PIES prior to such time in the manner specified in the Purchase Contract Agreement, or that give such notice but fail to deliver cash prior to 11:00 a.m., New York City time, on or prior to the fifth Business Day preceding the Purchase Contract Settlement Date, shall be deemed to have consented to the disposition of the shares of this Series that are a component of their Corporate PIES in the Remarketing. Holders of the shares of this Series that are not a component of Corporate PIES wishing to have their shares of this Series remarketed shall give to the Purchase Contract Agent notice of their election prior to 11:00 a.m., New York City time on such fifth Business Day. Any such notice shall be irrevocable and may not be conditioned upon the level at which the Reset Rate is established in the Remarketing. Promptly after 11:00 a.m., New York City time, on such fifth Business Day, the Purchase Contract Agent, based on the notices received by it prior to such time (including notices from the Purchase Contract Agent as to purchase contracts for which cash settlement has been elected and cash received), shall notify the Remarketing Agent of the number of shares of this Series to be tendered for purchase in the Remarketing.




(c)      If any Holder of shares of this Series does not give a notice of its intention to make a cash settlement or gives such notice but fails to deliver cash as described in Section 3(b) above, or gives a notice of election to have shares of this Series that are not a component of Corporate PIES remarketed, then the shares of this Series of such Holder shall be deemed tendered for purchase in the Remarketing, notwithstanding any failure by such Holder to deliver or properly deliver such shares to the Remarketing Agent for purchase.

(d)     The right of each Holder to have shares of this Series tendered for purchase shall be limited to the extent that (i) the Remarketing Agent conducts a remarketing pursuant to the terms of the Remarketing Agreement, (ii) the shares of this Series tendered have not been called for redemption, (iii) the Remarketing Agent is able to find a purchaser or purchasers for the tendered shares of this Series and (iv) such purchaser or purchasers deliver the purchase price therefor to the Remarketing Agent.

(e)      On the Remarketing Date, the Remarketing Agent shall use commercially reasonable efforts to remarket, at a price equal to 100.50% of the aggregate liquidation preference thereof, the shares of this Series tendered or deemed tendered for purchase.

(f)      If, as a result of the efforts described in Section 3(e), the Remarketing Agent determines that it will be able to remarket all of the shares of this Series tendered or deemed tendered for purchase at a price of 100.50% of the aggregate liquidation preference of such shares prior to 4:00 p.m., New York City time, on the Remarketing Date, the Remarketing Agent shall determine the Reset Rate, which shall be the rate per annum (rounded to the nearest one-thousandth (0.001) of one percent per annum) that the Remarketing Agent determines, in its sole judgment, to be the lowest rate per annum that will enable it to remarket all of the shares of this Series tendered or deemed tendered for Remarketing.

(g)     If none of the Holders of the shares of this Series or the holders of the Corporate PIES elects to have shares of this Series remarketed in the Remarketing, the Reset Rate shall be the rate determined by the Remarketing Agent, in its sole discretion, as the rate that would have been established had a Remarketing of all the shares of this Series been held on the Remarketing Date.

(h)     If, by 4:00 p.m., New York City time, on the Remarketing Date, the Remarketing Agent is unable to remarket all of the Preferred Securities tendered or deemed tendered for purchase, a “Failed Remarketing” shall be deemed to have occurred and the Remarketing Agent shall so advise by telephone the Depositary and the Company. In the event of a Failed Remarketing, the Reset Rate shall equal (1) the “AA” Composite Commercial Paper Rate (as defined below), plus (2) the Applicable Margin (as defined below).

(i)       By approximately 4:30 p.m., New York City time, on the Remarketing Date, provided that there has not been a Failed Remarketing, the Remarketing Agent shall advise, by telephone (i) the Depositary and the Company of the Reset Rate determined in




the Remarketing and the number of shares of this Series sold in the Remarketing, (ii) each purchaser (or the Depositary Participant thereof) of the Reset Rate and the number of shares of this Series such purchaser is to purchase and (iii) each purchaser to give instructions to its Depositary Participant to pay the purchase price on the Purchase Contract Settlement Date in same day funds against delivery of the shares of this Series purchased through the facilities of the Depositary.

(j)       In accordance with the Depositary’s normal procedures, on the Purchase Contract Settlement Date, the transactions described above with respect to each Preferred Security tendered for purchase and sold in the Remarketing shall be executed through the Depositary, and the accounts of the respective Depositary Participants shall be debited and credited and such shares of this Series delivered by book-entry as necessary to effect purchases and sales of such shares of this Series. The Depositary shall make payment in accordance with its normal procedures.

(k)      If any Holder of shares of this Series selling shares of this Series in the Remarketing fails to deliver such shares, the Depositary Participant of such selling holder and of any other Person that was to have purchased shares of this Series in the Remarketing may deliver to any such other Person a number of shares of this Series that is less than the number of shares of this Series that otherwise was to be purchased by such Person. In such event, the number of shares of this Series to be so delivered shall be determined by such Depositary Participant, and delivery of such lesser number of shares of this Series shall constitute good delivery.

(l)       Under the Remarketing Agreement, the Company shall be liable for, and shall pay, any and all costs and expenses incurred in connection with the Remarketing.

(m)     The tender and settlement procedures set in this Section 3, including provisions for payment by purchasers of the shares of this Series in the Remarketing, shall be subject to modification to the extent required by the Depositary or if the book-entry system is no longer available for the shares of this Series at the time of the Remarketing, to facilitate the tendering and remarketing of the shares of this Series in certificated form. In addition, the Remarketing Agent may modify the settlement procedures set forth herein in order to facilitate the settlement process.

(n)     Definitions:

“‘AA’ Composite Commercial Paper Rate” on any date shall mean (i) the interest equivalent of the 60-day rate on commercial paper placed on behalf of issuers whose corporate bonds are rated “AA” by S&P or the equivalent of such rating by S&P or the equivalent of such rating by S&P or another rating agency, as made available on a discount basis or otherwise by the Federal Reserve Board for the business day immediately preceding such date or (ii) if the Federal Reserve Board does not make available any such rate, then the arithmetic average of those rates, as quoted on a discount basis or otherwise, by the Commercial Paper Dealers to the Remarketing Agent for the close of business on the Business Day next preceding such date. If any Commercial




Paper Dealer does not quote a rate required to determine the “AA” Composite Commercial Paper Rate, the “AA” Composite Commercial Paper Rate will be determined on the basis of the quotation or quotations furnished by the remaining Commercial Paper Dealer or Commercial Paper Dealers and any substitute commercial paper dealer or substitute commercial paper dealers selected by the Remarketing Agent or, if the Remarketing Agent does not select any such substitute commercial paper dealer or substitute commercial paper dealers, by the remaining Commercial Paper Dealer or Commercial Paper Dealers.

“Applicable Margin” shall mean the spread determined as set forth below, based on the prevailing rating of the Remarketed shares of this Series in effect at the close of business on the Business Day immediately preceding the date of a Failed Remarketing:

Prevailing Rating

 

Spread

 

 

 

 

 

AA/ “aa”

 

3.00

%

A/ “a”

 

4.00

%

BBB/ “baa”

 

5.00

%

Below BBB/ “baa”

 

7.00

%

 

For purposes of this definition, the “prevailing rating” of the Remarketed shares of this Series shall be:

(i) AA/ aa if such shares have a credit rating of AA- or better by S&P and “aa3” or better by Moody’s or the equivalent of such ratings by such agencies or a substitute rating agency or substitute rating agencies selected by the Remarketing Agent;

(ii) if not under clause (i) above, then A/ a if the Remarketed Securities have a credit rating of A- or better by S&P and “a3” or better by Moody’s or the equivalent of such ratings by such agencies or a substitute rating agency or substitute rating agencies selected by the Remarketing Agent;

(iii) if not under clauses (i) or (ii) above, then BBB/ “baa” if the Remarketed Securities have a credit rating of BBB- or better by S&P and “baa3” or better by Moody’s or the equivalent of such ratings by such agencies or a substitute rating agency or substitute rating agencies selected by the Remarketing Agent; or

(iv) if not under clauses (i) - (iii) above, then below BBB/ “baa.”

“Certificate” shall mean a Corporate PIES Certificate.




“Commercial Paper Dealers” shall mean Lehman Commercial Paper Inc., Goldman, Sachs & Co. and Merrill Lynch, Pierce, Fenner & Smith Incorporated or their affiliates or successors, if such affiliates or successors are commercial paper dealers.

“Common Stock” shall mean the Common Stock, no par value, of the Company.

“Corporate PIES” shall mean a stock purchase unit consisting of (A) a stock purchase contract under which (i) the holder of the unit will purchase from the Company, for $50.00 in cash, a certain number of shares of common stock of the Company and (ii) the Company will pay such holder contract adjustment payments and (B) beneficial ownership of a shares of this Series.

“Corporate PIES Certificate” means a certificate evidencing the rights and obligations of a Holder in respect of the number of Corporate PIES specified on such certificate.

“Depositary” shall mean, with respect to shares of this Series issuable in whole or in part in the form of one or more Global Securities, a clearing agency registered under the Exchange Act that is designated to act as depositary for such shares, and initially shall be The Depository Trust Company.

“Depositary Participant” shall mean a member of, or participant in, the Depositary.

“Exchange Act” shall mean the Securities Exchange Act of 1934 and any statute successor thereto, in each case as amended from time to time, and the rules and regulations promulgated thereunder.

“Global Certificate” means a Certificate that evidences all or part of the shares of this Series and is registered in the name of a clearing agency or a nominee thereof.

“Global Security” shall mean a global Series H Preferred Stock Certificate registered in the name of a Depositary or its nominee.

“Holder” shall mean any holder of shares of this Series.

“Moody’s” shall mean Moody’s Investors Service, Inc.

“Purchase Contract Agent” shall mean the purchase contract agent under the Purchase Contract Agreement, including successor purchase contract agents.

“Purchase Contract Agreement” shall mean the Purchase Contract Agreement dated as of August 10, 1999 between the Company (through its predecessor entity, Bank United Corp.) and Bank One N.A. (under its prior name, The First National Bank of Chicago), as Purchase Contract Agent.




“Purchase Contract Settlement Date” shall mean August 16, 2002.

“Record Date” for dividends on the shares of this Series on any Payment Date shall mean, as to any Global Certificate, the Business Day next preceding such Payment Date, and as to any other Certificate, 15 Business Days prior to such Payment Date.

“Remarketing Agent” shall mean the remarketing agent selected by the Company, including any successor remarketing agents selected by the Company.

“Remarketing Date” shall mean the third Business Day preceding the Purchase Contract Settlement Date.

“Reset Rate” shall mean shall mean the distribution rate per annum that results from the Remarketing pursuant this Section 3.

“S&P” shall mean Standard & Poor’s Ratings Services, a division of McGraw-Hill Corporation.

4.       Redemption , (a) Optional Redemption. The shares of this Series are not redeemable prior to October 16, 2002. The Company, at its option, may redeem shares of this Series, as a whole or in part, at any time or from time to time, on or after October 16, 2002 at a redemption price of $50 per share plus accrued and unpaid cumulative dividends thereon (whether or not declared) to the date fixed for redemption.

(b)     Mandatory Redemption. The Company shall redeem, from any source of funds legally available therefor, all issued and outstanding shares of this Series, in whole and not in part, on August 16, 2004, at a redemption price of $50 per share plus accrued and unpaid cumulative dividends thereon (whether or not declared) to the date fixed for redemption.

(c)      Redemption Procedures.

(i)  In the event that, pursuant to paragraph (a) above, fewer than all the outstanding shares of this Series are to be redeemed, the number of shares to be redeemed shall be determined by the Board of Directors and the shares to be redeemed shall be determined by lot or pro rata as may be determined by the Board of Directors or by any other method as may be determined by the Board of Directors in its sole discretion to be equitable, provided that such method satisfies any applicable requirements of any securities exchange on which this Series is listed.

(ii)  In the event the Company shall redeem shares of this Series, notice of such redemption shall be given by first class mail, postage prepaid, mailed not less than 30 or more than 60 days prior to the redemption date, to each holder of record of the shares to be redeemed, at such holder’s address as the same appears on the stock register of the Company. Each such notice




shall state: (a) the redemption date; (b) the number of shares of this Series to be redeemed and, if fewer than all the shares held by such holder are to be redeemed, the number of such shares to be redeemed from such holder; (c) the redemption price; (d) the place or places where certificates for such shares are to be surrendered for payment of the redemption price; and (e) that dividends on the shares to be redeemed shall cease to accrue on the redemption date.

(iii)  Notice having been mailed as aforesaid, from and after the redemption date (unless default shall be made by the Company in providing money for the payment of the redemption price) dividends on the shares of this Series so called for redemption shall cease to accrue, and said shares shall no longer be deemed to be outstanding, and all rights of the holders thereof as stockholders of the Company (except the right to receive from the Company the redemption price) shall cease. Upon surrender in accordance with said notice of the certificates for any shares so redeemed (properly endorsed or assigned for transfer, if the Board of Directors shall so by the Company at the redemption price aforesaid. In case fewer than all the shares represented by any such certificate are redeemed, a without cost to the holder thereof.

(iv)  Any shares of this Series which shall at any time have been redeemed shall, after such redemption, have the status of authorized but unissued shares of Preferred Stock, without designation as to series until such shares are once more designated as part of a particular series by the Board of Directors.

(v)  Notwithstanding the foregoing provisions of this Section 4, if full cumulative dividends on all outstanding shares of this Series are in arrears, no shares of this Series shall be redeemed unless all outstanding shares of this Series are simultaneously redeemed, and the Company shall not purchase or otherwise acquire any shares of this Series; provided, however, that the foregoing shall not prevent the purchase or acquisition of shares of this Series pursuant to a purchase or exchange offer made on the same terms to holders of all outstanding shares of this Series.

5.       Conversion . The holders of shares of this Series shall not have any rights to convert such shares into shares of any other class or series of capital stock of the Company.

6.       Liquidation Rights . (a) Upon the voluntary or involuntary dissolution, liquidation or winding up of the Company, the holders of the shares of this Series shall be entitled to receive and to be paid out of the assets of the Company available for distribution to its stockholders, before any payment or distribution shall be made on the Common Stock or on any other class of stock ranking junior to this Series upon




liquidation, the amount of $50 per share, plus accrued and unpaid cumulative dividends (whether or not declared) to the date of the liquidating distribution.

(b)     After the payment to the holders of the shares of this Series of the full preferential amounts provided for in this Section 6, the holders of this Series as such shall have no right or claim to any of the remaining assets of the Company.

(c)      If, upon any voluntary or involuntary dissolution, liquidation, or winding up of the Company, the amounts payable with respect to the shares of this Series and any other shares of stock of the Company ranking as to any such distribution on a parity with the shares of this Series are not paid in full, the holders of the shares of this Series and of such other shares shall share ratably in any such distribution of assets of the Company in proportion to the full respective distributions to which they are entitled.

(d)     Neither the sale of all or substantially all the property or business of the Company, nor the merger or consolidation of the Company into or with any other corporation or the merger or consolidation of any other corporation into or with the Company, shall be deemed to be a dissolution, liquidation or winding up, voluntary or involuntary, for the purposes of this Section 6.

7.       Ranking . For purposes of this resolution, any stock of any class or classes of the Company shall be deemed to rank:

(a)      prior to the shares of this Series, either as to dividends or upon liquidation, if the holders of such class or classes shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Company, as the case may be, in preference or priority to the holders of shares of this Series;

(b)     on a parity with shares of this Series, either as to dividends or upon liquidation, whether or not the dividend rates, dividend payment dates or redemption or liquidation prices per share or sinking fund provisions, if any, be different from those of this Series (and whether or not such dividends shall accumulate), if the holders of such stock shall be entitled to the receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Company, as the case may be, without preference or priority, one over the other, as between the holders of such stock and the holders of shares of this Series; and

(c)      junior to shares of this Series, either as to dividends or upon liquidation; if such class shall be Common Stock or if the holders of shares of this Series shall be entitled to receipt of dividends or of amounts distributable upon dissolution, liquidation or winding up of the Company, as the case may be, in preference or priority to the holders of shares of such class or classes.

(d)     The shares of each of the other series of preferred stock of the Company shall rank on a parity with the shares of this Series.




8.       Voting Rights . The holders of the shares of this Series shall have the following voting rights:

(a)      Each share of this Series will have the right to vote, with each share of this Series having 0.10 vote, in connection with matters submitted generally to the holders of the common stock and other capital stock of the Company entitled to vote in respect of matters submitted to the stockholders of the Company generally. For these purposes, the holders of the shares of this Series and the holders of the common stock and such other capital stock of the Company, so entitled to vote, shall vote as a single class.

(b)     Unless the vote or consent of the holders of a greater number of shares shall then be required by law, the approval of the holders of at least two-thirds of the then-outstanding shares of this Series, given in person or by proxy, either in writing or by a vote at a meeting called for the purpose at which the holders of shares of this Series shall vote together as a separate class, shall be required for authorizing, effecting or validating any amendment, alteration or repeal, whether by merger, consolidation or otherwise, of any of the provisions of the Amended and Restated Articles of Incorporation of the Company or of any certificate amendatory thereof or supplemental thereto (including any Certificate of Designations or any similar document relating to any series of Preferred Stock) that adversely affect the powers, preferences, privileges or rights of this Series; provided, however, that the creation and issuance of any other class or series of preferred stock, or any increase in the number of authorized shares of any Preferred Stock of any other class or series, in each case ranking on a parity with or junior to this Series with respect to the payment of dividends and the distribution of assets upon liquidation, dissolution or winding up of the affairs of the Company shall not be deemed to adversely affect such powers, preferences or other special rights.

(c)      Unless the vote or consent of the holders of a greater number of shares shall then be required by law, the approval of the holders of at least two-thirds of all of the then-outstanding shares of this Series and all other series of preferred stock ranking on a parity with shares of this Series, either as to dividends or upon liquidation, given in person or by proxy, either in writing or by a vote at a meeting called for the purpose at which the holders of shares of this Series and such other series of Preferred Stock shall vote together as a single class without regard to series, shall be necessary for authorizing, effecting or validating (i) the creation, authorization or issuance of, (ii) the reclassification of any authorized stock of the Company into, or (iii) the creation, authorization or issuance of any obligation or security convertible into or evidencing the right to purchase, any additional class or series of stock ranking prior to this Series, either as to dividends or upon liquidation.

(d)      (i)  If at any time dividends on this Series shall be in arrears in an amount equal to six quarterly dividends thereon, the occurrence of such contingency shall mark the beginning of a period (herein called a “default period”) which shall extend until such time as all accrued and unpaid dividends for all previous dividend periods and for the current dividend period on all shares of this Series then outstanding shall have been




declared and paid or set apart for payment. During each default period, the holders of shares of this Series and other shares of Preferred Stock on which dividends are in arrears and as to which similar voting rights have been conferred, voting as a class, irrespective of series, shall have the right to elect two Directors to the Board of Directors of the Company.

(ii)  During any default period, such voting right of the holders of this Series may be exercised by written consent, at a special meeting called pursuant to Section 7(d)(iii) hereof or at any annual meeting of stockholders. The absence of a quorum of the holders of Common Stock at any such special or annual meeting shall not affect the exercise by the holders of Preferred Stock of such voting right. At any meeting at which the holders of Preferred Stock shall exercise such voting right initially during an existing default period, they shall have the right, voting as a class, to elect Directors to fill such vacancies, if any, in the Board of Directors as may then exist up to two Directors or, if such right is exercised at an annual meeting, to elect two Directors. If the number which may be so elected at any special meeting does not amount to the required number, the holders of Preferred Stock shall have the right to make such increase in the number of Directors as shall be necessary to permit the election by them of the required number. After the holders of the Preferred Stock shall have exercised their right to elect Directors in any default period and during the continuance of such period, the number of Directors shall not be increased or decreased except by vote of the holders of Preferred Stock as herein provided. Any Director elected by a vote of the holders of Preferred Stock may be removed from office, with or without cause, only by the affirmative vote of the requisite percentage of holders of Preferred Stock required to elect Directors as specified in this Section 8(d).

(iii)  Unless the holders of Preferred Stock, during an existing default period, shall have previously exercised their right to elect Directors, the Board of Directors may order, or any shareholder or shareholders owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding, irrespective of series, on which dividends are in arrears and as to which similar voting rights have been conferred, may request, the calling of a special meeting of the holders of Preferred Stock, which meeting shall thereupon be called by the Chairman, a Vice Chairman or the Secretary of the Company. Notice of such meeting and of any annual meeting at which holders of Preferred Stock are entitled to vote pursuant to this Section 7(d)(iii) shall be given to each holder of record of Preferred Stock entitled to vote thereat by mailing a copy of such notice to him at his last address as the same appears on the books of the Company on such record date, not more than 45 days prior to the date of such notice, as the Board of Directors may fix for this purpose. Such meeting shall be called for a time not earlier than 10 days and not




later than 60 days after such order or request or, in default of the calling of such meeting within 60 days after such order or request, such meeting may be called on similar notice by any shareholder or shareholders owning in the aggregate not less than 10% of the total number of shares of Preferred Stock outstanding, irrespective of series, entitled to vote thereat.

(iv)  In any default period the holders of Common Stock, and other classes of stock of the Company if applicable, shall continue to be entitled to elect the whole number of Directors constituting the Board of Directors until the holders of Preferred Stock, voting as a class, shall have exercised their right to elect two Directors, after the exercise of which right (A) the Directors so elected by the holders of Preferred Stock shall continue in office until their successors shall have been elected by such holders or until the expiration of the default period, and (B) any vacancy on the Board of Directors may (except as provided in Section 8(d)(ii) hereof) be filled by vote of a majority of the remaining Directors theretofore elected by the holders of the class of stock which elected the Director whose office shall have become vacant. References in this Section 8(d) to Directors elected by the holders of a particular class of stock shall include Directors elected by such Directors to fill vacancies as provided in clause (B) of the foregoing sentence.

(v)  Immediately upon the expiration of a default period, (A) the right of the holders of Preferred Stock as a class to elect Directors shall cease, (B) the term of any Directors elected by the holders of Preferred Stock as a class shall terminate, and (C) the number of Directors shall be such number as may be provided for in the Amended and Restated Articles of Incorporation or Bylaws of the Company or by resolution of the Board of Directors, irrespective of any increase made pursuant to the provisions of Section 8(d)(ii) hereof (such number being subject, however, to change thereafter in any manner provided by law or in the Amended and Restated Articles of Incorporation or Bylaws of the Company). Any vacancies on the Board of Directors effected by the provisions of clauses (B) and (C) in the preceding sentence may be filled by a majority of the remaining Directors.

(e)      Except as set forth herein or required by applicable law, holders of shares of this Series shall have no voting rights and their consent shall not be required for taking any corporate action.

THIRD:        These amendments do not provide for an exchange, reclassification or cancellation of any issued shares.

FOURTH:    The foregoing amendments to the amended and restated articles of incorporation were adopted by the Board of Directors of Washington Mutual, Inc. on October 17, 2000. Shareholder action was not required.




EXECUTED this 8th day of February, 2001.

WASHINGTON MUTUAL, INC.

 

 

 

 

 

 

 

 

 

By:

/s/ William L. Lynch

 

 

 

William L. Lynch

 

Its:

Secretary

 




FILED

 

STATE OF WASHINGTON

 

JAN 22 2001

SECRETARY OF STATE

 

ARTICLES OF AMENDMENT

TO THE

RESTATED ARTICLES OF INCORPORATION

OF

WASHINGTON MUTUAL, INC.

Pursuant to the provisions of RCW 23B.10 of the Washington Business Corporation Act, Washington Mutual, Inc., a Washington corporation (the “Corporation”) hereby adopts the following articles of amendment to its restated articles of incorporation.

FIRST: The name of the Corporation is Washington Mutual, Inc.

SECOND: The Corporation hereby creates, from the 10,000,000 shares of preferred stock, no par value per share, authorized pursuant to Article II of the restated articles of incorporation of the Corporation, a series of preferred stock and hereby fixes the designation, powers, preferences, limitations, and relative rights of the shares of such series as follows:

Section 1. Designation, Par Value and Amount . The shares of such series shall be designated as “Series RP Preferred Stock” (hereinafter referred to as “ Series RP Preferred Stock ”), the shares of such series shall be with par value of $.01 per share, and the number of shares constituting such series shall be 700,000; provided , however , that, if more than a total of 700,000 shares of Series RP Preferred Stock shall be issuable upon the exercise of Rights (the “Rights”) issued pursuant to the Rights Agreement, dated as of December 20, 2000, between the Corporation and Mellon Investor Services, L.L.C., as Rights Agent (as amended from time to time, the “ Rights Agreement ”), the Board of Directors of the Corporation shall direct by resolution or resolutions that a certificate be properly executed, acknowledged and filed providing for the total number of shares of Series RP Preferred Stock authorized to be issued to be increased (to the extent that the Articles of Incorporation then permits) to the largest number of whole shares (rounded up to the nearest whole number) issuable upon exercise of the Rights.

Section 2.                   Dividends and Distributions .

2.1                      Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series RP Preferred Stock with respect to dividends, the holders of shares of Series RP Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of assets legally available for the purpose, quarterly dividends payable in cash on the first business day of March, June, September and December in each year (each such date being referred to herein as a “ Quarterly Dividend Payment Date ”), commencing on the first Quarterly Dividend Payment Date after the first issuance of a share or fraction of a share of Series RP Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provision for

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adjustment set forth in Section 6.1, 1,000 times the aggregate per share amount of all cash dividends, and 1,000 times the aggregate per share amount (payable in kind) of all non-cash dividends or other distributions other than a dividend payable in shares of Common Stock, par value $.01 per share, of the Corporation (the “ Common Stock ”) or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series RP Preferred Stock.

2.2                      The Corporation shall declare a dividend or distribution on the Series RP Preferred Stock as provided in Section 2.1 above immediately after it declares a dividend or distribution on the Common Stock (other than a dividend payable in shares of Common Stock); provided that , in the event no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series RP Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date.

2.3                      Dividends shall begin to accrue and be cumulative on outstanding shares of Series RP Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series RP Preferred Stock, unless the date of issue of such shares is prior to the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue from the date of issue of such shares, or unless the date of issue is a Quarterly Dividend Payment Date or is a date after the record date for the determination of holders of shares of Series RP Preferred Stock entitled to receive a quarterly dividend and before such Quarterly Dividend Payment Date, in either of which events such dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on the shares of Series RP Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series RP Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall be not more than 30 days prior to the date fixed for the payment thereof.

Section 3.                   Voting Rights . The holders of shares of Series RP Preferred Stock shall have the following voting rights:

3.1                      Except as provided in Section 3.3 and subject to the provision for adjustment hereinafter set forth, each share of Series RP Preferred Stock shall entitle the holder thereof to 1,000 votes on all matters submitted to a vote of the stockholders of the Corporation.

3.2                      Except as otherwise provided herein or by law, the holders of shares of Series RP Preferred Stock and the holders of shares of Common Stock shall vote together as one class on all matters submitted to a vote of stockholders of the Corporation.

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3.3                      The following additional provisions shall apply with respect to the voting of shares of Series RP Preferred Stock:

3.3.1             If, on the date used to determine stockholders of record for any meeting of stockholders for the election of directors, a default in preference dividends (as defined in Section 3.3.5 below) on the Series RP Preferred Stock shall exist, the holders of the Series RP Preferred Stock shall have the right, voting as a class as described in Section 3.3.2 below, to elect two directors (in addition to the directors elected by holders of Common Stock of the Corporation). Such right may be exercised (a) at any meeting of stockholders for the election of directors or (b) at a meeting of the holders of shares of Voting Preferred Stock (as hereinafter defined), called for the purpose in accordance with the Bylaws of the Corporation, until all such cumulative dividends (referred to above) shall have been paid in full or until non-cumulative dividends have been paid regularly for at least one year.

3.3.2             The right of the holders of Series RP Preferred Stock to elect two directors, as described above, shall be exercised as a class concurrently with the rights of holders of any other series of Preferred Stock upon which voting rights to elect such directors have been conferred and are then exercisable. The Series RP Preferred Stock and any additional series of Preferred Stock that the Corporation may issue and that may provide for the right to vote with the foregoing series of Preferred Stock are collectively referred to herein as “ Voting Preferred Stock .”

3.3.3             Each director elected by the holders of shares of Voting Preferred Stock shall be referred to herein as a “ Preferred Director .” A Preferred Director shall continue to serve as such for a term of one year, except that upon any termination of the right of all holders of Voting Preferred Stock to vote as a class for Preferred Directors, the term of office of Preferred Directors then serving shall terminate. Any Preferred Director may be removed by, and shall not be removed except by, the vote of the holders of record of a majority of the outstanding shares of Voting Preferred Stock then entitled to vote for the election of directors, present (in person or by proxy) and voting together as a single class (a) at a meeting of the stockholders, or (b) at a meeting of the holders of shares of such Voting Preferred Stock, called for the purpose in accordance with the Bylaws of the Corporation.

3.3.4             So long as a default in any preference dividends of the Series RP Preferred Stock shall exist or the holders of any other series of Voting Preferred Stock shall be entitled to elect Preferred Directors, (a) any vacancy in the office of a Preferred Director may be filled (except as provided in the following clause (b)) by an instrument in writing signed by the remaining Preferred Director and filed with the Corporation and (b) in the case of the removal of any Preferred Director, the vacancy may be filled by the vote or written consent of the holders of a majority of the outstanding shares of Voting Preferred Stock then entitled to vote for the election of directors, present (in person or by proxy) and voting together as a single class, at such time as the removal shall be effected. Each director appointed as aforesaid by the remaining Preferred Director shall be deemed, for all purposes hereof, to be a Preferred Director. Whenever (x) no default in preference dividends on the Series RP Preferred Stock shall exist and (y) the holders of other series of Voting Preferred Stock shall no longer be entitled to elect such

3




Preferred Directors, then the number of directors constituting the Board of Directors of the Corporation shall be reduced by two.

3.3.5             For purposes hereof, a “ default in preference dividends ” on the Series RP Preferred Stock shall be deemed to have occurred whenever the amount of cumulative and unpaid dividends on the Series RP Preferred Stock shall be equivalent to six full quarterly dividends or more (whether or not consecutive), and, having so occurred, such default shall be deemed to exist thereafter until, but only until, all cumulative dividends on all shares of the Series RP Preferred Stock then outstanding shall have been paid through the last Quarterly Dividend Payment Date or until, but only until, non-cumulative dividends have been paid regularly for at least one year.

3.4                      Except as set forth herein (or as otherwise required by applicable law), holders of Series RP Preferred Stock shall have no general or special voting rights and their consent shall not be required for taking any corporate action.

Section 4.   Certain Restrictions .

4.1                      Whenever quarterly dividends or other dividends or distributions payable on the Series RP Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on shares of Series RP Preferred Stock outstanding shall have been paid in full, the Corporation shall not:

4.1.1             declare or pay dividends, or make any other distributions, on any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series RP Preferred Stock;

4.1.2             declare or pay dividends, or make any other distributions, on any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series RP Preferred Stock, except dividends paid ratably on the Series RP Preferred Stock and all such parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled;

4.1.3             redeem or purchase or otherwise acquire for consideration (except as provided in Section 4.1.4 below) shares of any stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series RP Preferred Stock, provided that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of any stock of the Corporation ranking junior (either as to dividends or upon dissolution, liquidation or winding up) to the Series RP Preferred Stock;

4.1.4             redeem or purchase or otherwise acquire for consideration any shares of Series RP Preferred Stock, or any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series RP Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of such shares upon such terms as the Board of Directors,

4




after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes.

4.2                      The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for consideration any shares of stock of the Corporation unless the Corporation could, under Section 4.1, purchase or otherwise acquire such shares at such time and in such manner.

Section 5.    Reacquired Shares . Any shares of Series RP Preferred Stock purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock and may be reissued as part of a new series of Preferred Stock subject to the conditions and restrictions on issuance set forth herein, in the Certificate of Incorporation, in any other Certificate of Amendment creating a series of Preferred Stock or as otherwise required by law.

Sections 6.             Liquidation, Dissolution or Winding Up .

6.1                      Subject to the prior and superior rights of holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series RP Preferred Stock with respect to rights upon liquidation, dissolution or winding up (voluntary or otherwise), no distribution shall be made to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series RP Preferred Stock unless, prior thereto, the holders of shares of Series RP Preferred Stock shall have received per share an amount equal to the greater of 1,000 times $200.00 or 1,000 times the payment made per share of Common Stock, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment (the “ Series RP Liquidation Preference ”). Following the payment of the full amount of the Series RP Liquidation Preference, no additional distributions shall be made to the holders of shares of Series RP Preferred Stock unless, prior thereto, the holders of shares of Common Stock shall have received an amount per share (the “ Capital Adjustment ”) equal to the quotient obtained by dividing (i) the Series RP Liquidation Preference by (ii) 1,000 (as appropriately adjusted as set forth in Section 6.3 to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) (such number in clause (ii) being hereafter referred to as the “ Adjustment Number ”). Following the payment of the full amount of the Series RP Liquidation Preference and the Capital Adjustment in respect of all outstanding shares of Series RP Preferred Stock and Common Stock, respectively, holders of Series RP Preferred Stock and holders of Common Stock shall receive their ratable and proportionate share of the remaining assets to be distributed in the ratio of the Adjustment Number to 1 with respect to such Preferred Stock and Common Stock, on a per share basis, respectively.

6.2                      In the event, however, that there are not sufficient assets available to permit payment in full of the Series RP Liquidation Preference and the liquidation preferences of all other series of preferred stock, if any, which rank on a parity with the Series RP Preferred

5




Stock, then such remaining assets shall be distributed ratably to the holders of Series RP Preferred Stock and the holders of such parity shares in proportion to their respective liquidation preferences. In the event, however, that there are not sufficient assets available to permit payment in full of the Capital Adjustment, then such remaining assets shall be distributed ratably to the holders of Common Stock.

6.3                      In the event the Corporation shall (i) declare any dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii) combine the outstanding Common Stock into a smaller number of shares, then in each such case the Adjustment Number in effect immediately prior to such event shall be adjusted by multiplying such Adjustment Number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event.

Section 7.    Consolidation, Merger, etc . In case the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash and/or any other property, then in any such case the shares of Series RP Preferred Stock shall at the same time be similarly exchanged or changed in an amount per share equal to the Adjustment Number (as appropriately adjusted as set forth in Section 6.3 to reflect such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock) times the aggregate amount of stock, securities, cash and/or any other property (payable in kind), as the case may be, into which or for which each share of Common Stock is changed or exchanged.

Section 8.   No Redemption . The shares of Series RP Preferred Stock shall not be redeemable.

Section 9.   Ranking . The Series RP Preferred Stock shall rank junior to all other series of the Corporation’s Preferred Stock as to the payment of dividends and the distribution of assets, unless the terms of any such other series shall provide otherwise.

Section 10.   Amendment . The Articles of Incorporation of the Corporation shall not be further amended in any manner that would materially alter or change the powers, preferences or special rights of the Series RP Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding shares of Series RP Preferred Stock, voting separately as a class.

Section 11.    Fractional Shares . Series RP Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder’s fractional shares, to exercise voting rights, receive dividends, participate in distributions and have the benefit of all other rights of holders of Series RP Preferred Stock.

THIRD:                            These Articles of Amendment were duly adopted on December 19, 2000.

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FOURTH:                These Articles of Amendment were duly adopted by the Board of Directors, pursuant to the provisions of RCW 23B.06.020 at a meeting of the Board on December 19, 2000. Shareholder approval is not required.

[Remainder of page intentionally left blank.]

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Executed this 19th day of January, 2001.

WASHINGTON MUTUAL, INC.

 

 

 

 

 

 

 

By:

/s/ William Lynch

 

 

 

William Lynch

 

 

Secretary

 

8




STATE of WASHINGTON

SECRETARY of STATE

I, RALPH MUNRO, Secretary of State of the State of Washington and custodian of its seal, hereby issue this

CERTIFICATE OF AMENDMENT

to

WASHINGTON MUTUAL, INC.

a Washington Profit corporation. Articles of Amendment were filed for record in this office on the date indicated below.

Amending and Restating Articles

UBI Number: 601 566 389

 

Date: October 29, 1999

 

 

 

 

[SEAL]

Given under my hand and the Seal of the State
of Washington at Olympia, the State Capital

 

 

 

/s/ Ralph Munro

 

 

Ralph Munro, Secretary of State
2-496256-5

 




FILED

 

STATE OF WASHINGTON

 

OCT 29 1999

 

RALPH MUNRO

 

SECRETARY OF STATE

 

AMENDED AND RESTATED ARTICLES OF INCORPORATION

OF

WASHINGTON MUTUAL, INC.

Pursuant to the provisions of RCW 23B.10.070 of the Washington Business Corporation Act, Washington Mutual, Inc. , a Washington corporation, hereby restates its Articles of Incorporation as now and heretofore amended:

ARTICLE I

Name

The name of this corporation is:

WASHINGTON MUTUAL, INC.

ARTICLE II

Capital Stock

A.                       Issuance of and Payment for Stock . The total number of shares of capital stock which the Company has authority to issue is 1,610,000,000 shares of which 1,600,000,000 shares shall be shares of common stock with no par value per share and 10,000,000 shares shall be shares of preferred stock with no par value per share. The shares may be issued by the Company from time to time as approved by its Board of Directors without the approval of the shareholders. The consideration for issuance of the shares shall be paid in full before their issuance. Neither promissory notes nor the promise of future services shall constitute payment or part payment for the issuance of shares of the Company. The consideration for the shares shall be cash, tangible or intangible property, labor or services actually performed for the Company or any combination of the foregoing. In the absence of actual fraud in the transaction, the value of such property, labor or services, as determined by the Board of Directors of the Company, shall be conclusive. Upon payment of such consideration, such shares shall be deemed to be fully paid and non-assessable.

B.                         Voting by Class or Series . Except as expressly provided in these Articles or in any resolutions of the Board of Directors designating and establishing the terms of any series of preferred stock, no holders of any class or series of capital stock shall have any




right to vote as a separate class or series or to vote more than one vote per share. Notwithstanding the foregoing, the restriction on voting separately by class or series shall not apply to the extent that applicable law requires such voting, nor shall this restriction apply to any amendment to these Articles which would adversely change the specific terms of any class or series of capital stock as set forth in this Article II or in any resolution of the Board of Directors designating and establishing the terms of any series of preferred stock. For purposes of the preceding sentence, an amendment which increases the number of authorized shares of any class or series of capital stock, or substitutes the surviving institution in a merger or consolidation for the Company, shall not be such an adverse change.

C.                         Common Stock . On matters on which holders of common stock are entitled to vote, each holder of shares of common stock shall be entitled to one vote for each share held by such holder.

Whenever there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of any class of stock having preference over the common stock as to the payment of dividends, the full amount of dividends and of sinking fund or retirement fund or other retirement payments, if any, to which such holders are respectively entitled in preference to the common stock, then dividends may be paid on the common stock and on any class or series of stock entitled to participate therewith as to dividends, out of any assets legally available for the payment of dividends; but only when and as declared by the Board of Directors.

In the event of any liquidation, dissolution or winding up of the Company, after there shall have been paid to or set aside for the holders of any class having preferences over the common stock in the event of liquidation, dissolution or winding up of the full preferential amounts to which they are respectively entitled, the holders of the common stock, and of any class or series of stock entitled to participate therewith, in whole or in part, as to distribution of assets, shall be entitled, after payment or provision for payment of all debts and liabilities of the Company, to receive pro rata the remaining assets of the Company available for distribution, in cash or in kind.

Each share of common stock shall have the same relative rights as and be identical in all respects with all the other shares of common stock.

D.                        Preferred Stock . The authorized Preferred Stock shall be comprised of 10,000,000 shares no par value per share. The Board of Directors of the Company is authorized by resolution or resolutions from time to time adopted, to provide for the issuance of preferred stock in one or more additional series by designating and establishing the terms of such a series. With respect to any such series, the Board of Directors is authorized to fix and state the voting powers, designations, preferences and

2




relative, participating, optional or other special right of the shares of each such series and the qualifications, limitations and restrictions thereon, including, but not limited to, determination of any of the following:

(1)                       The distinctive serial designation and the number of shares constituting such series;

(2)                       The dividend rates or the amount of dividends to be paid on the shares of such series, whether dividends shall be cumulative and, if so, from which date or dates, the payment date or dates for dividends, and the participating or other special rights, if any, with respect to dividends;

(3)                       The voting powers, full, special or limited, if any, of shares of such series;

(4)                       Whether the shares of such series shall be redeemable and, if so, the price or prices at which, and the terms and conditions on which, such shares may be redeemed;

(5)                       The amount or amounts payable upon the shares of such series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Company;

(6)                       Whether the shares of such series shall be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of such shares, and if so entitled, the amount of such fund and the manner of its application, including the price or prices at which such shares may be redeemed or purchased through the application of such fund;

(7)                       Whether the shares of such series shall be convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any other class or classes of stock of the Company and, if so convertible or exchangeable, the conversion price or prices, or the rate of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange; and

(8)                       Whether the shares of such series which are redeemed or converted shall have the status of authorized but unissued shares of serial preferred stock and whether such shares may be reissued as shares of the same or any other series of serial Preferred Stock.

Each share of each series of preferred stock shall have the same relative rights as and be identical in all respects with all the other shares of the same series.

3




While the foregoing authorizes the Board of Directors, in establishing the terms of a series of Preferred Stock, to permit holders of that series of Preferred Stock to elect separately one or more directors, in no event shall the total number of directors separately elected by holders of one or more series of Preferred Stock equal or exceed fifty percent (50%) of the total number of authorized directors.

ARTICLE III

Preemptive Rights

The shareholders of the Company shall have no preemptive rights to acquire additional shares of the Company.

ARTICLE IV

Board of Directors

The Company shall be managed by a Board of Directors. The number of directors shall be stated in the Company’s Bylaws, provided, however, that such number shall be not less than five (5). There shall be three classes of elected directors designated as Class 1, Class 2, and Class 3 directors. Each class shall contain one-third of the total number of directors, as near as may be. The terms of the Class 1 directors shall expire at the first annual shareholders’ meeting after their election. The terms of the Class 2 directors shall expire at the second annual shareholders’ meeting after their election. The terms of the Class 3 directors shall expire at the third annual shareholders’ meeting after their election. At each annual shareholders’ meeting held thereafter, directors shall be chosen for a term of three years to succeed those whose terms expire. A vacancy on the Board of Directors may be filled by the Board in accordance with the applicable provisions of the Company’s Bylaws. A director elected to fill a vacancy shall be elected for a term of office continuing only until the next election of directors by shareholders.

4




ARTICLE V

Removal of Directors

Any director may be removed by the shareholders only with good cause and in accordance with the applicable provisions of the Company’s Bylaws.

ARTICLE VI

Cumulative Voting

The right to cumulate votes in the election of directors shall not exist with respect to shares of stock of the Company.

ARTICLE VII

Bylaws

The Board of Directors has the power to adopt, amend or repeal the Bylaws of the Company, subject to the concurrent power of the shareholders, by at least two-thirds affirmative vote of the shares of the Company entitled to vote thereon, to adopt, amend or repeal the Bylaws.

ARTICLE VIII

Shareholder Vote Required to Approve Substantial Business Transaction

If pursuant to the Washington Business Corporations Act the Company’s shareholders are required to approve a plan of merger, share exchange, or other disposition of all, or substantially all of the Company’s property, otherwise than in the usual and regular course of business (each of the foregoing, a “Substantial Business Transaction”), then (a) if two-thirds of the directors vote to recommend the Substantial Business Transaction to the shareholders, the Substantial Business Transaction shall be approved by each voting group entitled to vote thereon by a simple majority of all votes entitled to be cast by that group; (b) in all other cases where a shareholder vote is required by the Washington Business Corporation Act, such Act, as it may be amended, shall control.

5




ARTICLE IX

Indemnification

The Company shall indemnify any individual made a party to a proceeding because that individual is or was a director of the Company and shall advance or reimburse the reasonable expenses incurred by such individual in advance of final disposition of the proceeding, without regard to the limitations in RCW 23B.08.510 through 23B.08.550 of the Washington Business Corporation Act, or any other limitation that may hereafter be enacted to the extent such limitation may be disregarded if authorized by the articles of incorporation, to the full extent and under all circumstances permitted by applicable law.

ARTICLE X

Business Combinations

A.                       For the purposes of this Article X:

(1)                       The terms “Affiliate” and “Associate” shall have the meanings attached to them by Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or any similar successor rule.

(2)                       The term “beneficial owner” and correlative terms shall have the meaning as set forth in Rule 13d-3 under the Securities Exchange Act of 1934, as amended, or any similar successor rule. Without limitation and in addition to the foregoing, any shares of Voting Stock of the Company which any Major Stockholder has the right to vote or to acquire (i) pursuant to any agreement, (ii) by reason of tenders of shares by shareholders of the Company in connection with or pursuant to a tender offer made by such Major Stockholder (whether or not any tenders have been accepted, but excluding tenders which have been rejected), or (iii) upon the exercise of conversion rights, warrants, options or otherwise, shall be deemed “beneficially owned” by such Major Stockholder.

(3)                       The term “Business Combination” shall mean:

(a)                       any merger or consolidation (whether in a single transaction or a series of related transactions, including a series of separate transactions with a Major Stockholder, any Affiliate or Associate thereof or any Person acting in concert therewith) of the Company or any Subsidiary with or into a Major Stockholder or of a Major Stockholder into the Company or a Subsidiary;

6




(b)                      any sale, lease, exchange, transfer, distribution to stockholders or other disposition, including without limitation, a mortgage, pledge or any other security device, to or with a Major Stockholder by the Company or any of its Subsidiaries (in a single transaction or a series of related transactions) of all, substantially all or any Substantial Part of the assets of the Company or a Subsidiary (including, without limitation, any securities of a Subsidiary);

(c)                       the purchase, exchange, lease or other acquisition by the Company or any of its Subsidiaries (in a single transaction or a series of related transactions) of all, substantially all or any Substantial Part of the assets or business of a Major Stockholder;

(d)                      the issuance of any securities, or of any rights, warrants or options to acquire any securities, of the Company or a Subsidiary to a Major Stockholder or the acquisition by the Company or a Subsidiary of any securities, or of any rights, warrants or options to acquire any securities, of a Major Stockholder;

(e)                       any reclassification of Voting Stock, recapitalization or other transaction (other than a redemption in accordance with the terms of the security redeemed) which has the effect, directly or indirectly, of increasing the proportionate amount of Voting Stock of the Company or any Subsidiary which is beneficially owned by a Major Stockholder, or any partial or complete liquidation, spin off, split off or split up of the Company or any Subsidiary; provided, however, that this Section A(3)(e) shall not relate to any transaction of the types specified herein that has been approved by a majority of the Continuing Directors; and

(f)                         any agreement, contract or other arrangement providing for any of the transactions described herein.

(4)                       The term “Continuing Director” shall mean (i) a person who was a member of the Board of Directors of the Company immediately prior to the time that any then-existing Major Stockholder became a Major Stockholder, or (ii) a person designated (before initially becoming a director) as a Continuing Director by a majority of the then Continuing Directors. All references to a vole of the Continuing Directors shall mean a vote of the total number of Continuing Directors.

(5)                       The term “Major Stockholder” shall mean any Person which, together with its Affiliates and Associates and any Person acting in concert therewith, is the beneficial owner of five percent (5%) or more of the votes held by the holders of the outstanding shares of the Voting Stock of the Company, and any Affiliate or Associate of a Major Stockholder, including a Person acting in concert therewith. The term “Major Stockholder” shall not include a Subsidiary.

7




(6)                       The term “other consideration to be received” shall include, without limitation, Voting Stock retained by the Company’s existing shareholders in the event of a Business Combination which is a merger or consolidation in which the Company is the surviving corporation.

(7)                       The term “Person” shall mean any individual, corporation, partnership or other person, group or entity (other than the Company, any Subsidiary or a trustee holding stock for the benefit of employees of the Company or its Subsidiaries, or any one of them, pursuant to one or more employee benefit plans or arrangements). When two or more persons act as a partnership, limited partnership, syndicate, association or other group for the purpose of acquiring, holding or disposing of shares of stock, such partnerships, syndicate, association or group will be deemed a “Person.”

(8)                       The term “Subsidiary” shall mean any business entity fifty percent (50%) or more of which is beneficially owned by the Company.

(9)                       The term “Substantial Part,” as used in reference to the assets of the Company or any Subsidiary or of any Major Stockholder means assets having a value of more than five percent (5%) of the total consolidated assets of the Company and its Subsidiaries as of the end of the Company’s most recent fiscal year ending prior to the time the determination is made.

(10)                 The term “Voting Stock” shall mean the stock or other securities entitled to vote upon any action to be taken in connection with any Business Combination or entitled to vote generally in the election of directors, including stock or other securities convertible into Voting Stock.

B.                         Notwithstanding any other provisions of these Articles of Incorporation and except as set forth in Section C of this Article X, neither the Company nor any Subsidiary shall be a party to a Business Combination unless:

(1)                       The Business Combination was approved by the Board of Directors of the Company prior to the Major Stockholder involved in the Business Combination becoming such; or

(2)                       The Major Stockholder involved in the Business Combination sought and obtained the unanimous prior approval of the Board of Directors to become a Major Stockholder and the Business Combination was approved by a majority of the Continuing Directors; or

(3)                       The Business Combination was approved by at least eighty percent (80%) of the Continuing Directors of the Company; or

8




(4)                       The Business Combination was approved by at least ninety-five percent (95%) of the outstanding Voting Stock beneficially owned by shareholders other than any Major Stockholder.

C.                         The approval requirements of Section B shall not apply if:

(1)                       The Business Combination is approved by at least the majority vote of the shares of the Voting Stock and the majority vote of the shares of the Voting Stock beneficially owned by shareholders other than any Major Stockholder; and

(2)                       All of the following conditions are satisfied:

(a)                       The aggregate of the cash and the fair market value of other consideration to be received per share (as adjusted for stock splits, stock dividends, reclassification of shares into a lesser number and similar events) by holders of the common stock of the Company in the Business Combination is not less than the higher of (i) the highest per share price (including brokerage commissions, soliciting dealers’ fees, dealer-management compensation, and other expenses, including, but not limited to, costs of newspaper advertisements, printing expenses and attorneys’ fees) paid by the Major Stockholder in acquiring any of the Company’s common stock; or (ii) an amount which bears the same or a greater percentage relationship to the market price of the Company’s common stock immediately prior to the announcement of such Business Combination as the highest per share price determined in (i) above bears to the market price of the Company’s common stock immediately prior to the commencement of acquisition of the Company’s common stock by such Major Stockholder, but in no event in excess of two times the highest per share price determined in (i) above; and

(b)                      The consideration to be received in such Business Combination by holders of the common stock of the Company shall be, except to the extent that a stockholder agrees otherwise as to all or a part of his or her shares, in the same form and of the same kind as paid by the Major Stockholder in acquiring his Voting Stock.

(c)                       After becoming a Major Stockholder and prior to the consummation of such Business Combination, (i) such Major Stockholder shall not have acquired any newly issued shares of capital stock, directly or indirectly, from the Company or a Subsidiary (except upon conversion of convertible securities acquired by it prior to becoming a Major Stockholder or upon compliance with the provisions of this Article X or as a result of a pro rata stock dividend or stock split), and (ii) such Major Stockholder shall not have received the benefit, directly or indirectly (except proportionately as a shareholder), of any loans, advances, guarantees, pledges or other

9




financial assistance or tax credits provided by the Company or a Subsidiary, or made any major changes in the Company’s business or equity capital structure; and

(d)                      A proxy statement responsive to the requirements of the Securities Exchange Act of 1934, whether or not the Company is then subject to such requirements, shall be mailed to all shareholders of the Company for the purpose of soliciting shareholder approval of such Business Combination and shall contain on the front thereof, in a prominent place, (i) any recommendations as to the advisability (or inadvisability) of the Business Combination which the Continuing Directors may choose to state, and (ii) the opinion of a reputable national investment banking firm as to the fairness (or lack thereof) of the terms of such Business Combination, from the point of view of the remaining shareholders of the Company. Such investment banking firm shall be engaged solely on behalf of the remaining shareholders, be paid a reasonable fee for their services by the Company upon receipt of such opinion, and be one of the so-called major bracket investment banking firms which has not previously been associated with such Major Stockholder and to be selected by a majority of the Continuing Directors.

D.                        During the time a Major Stockholder exists, a resolution to voluntarily dissolve the Company shall be adopted only upon: (1) the consent of all of the Company’s shareholders; or (2) the affirmative vote of at least two-thirds of the total number of directors, the affirmative vote of the holders of at least two-thirds of the shares of the Company entitled to vote thereon, and the affirmative vote of the holders of at least two-thirds of the shares of each class of shares entitled to vote thereon as a class, if any.

E.                          As to any particular transaction, the Continuing Directors shall have the power and duty to determine, on the basis of information known to them:

(1)                       The amount of Voting Stock beneficially held by any Person;

(2)                       Whether a Person is an Affiliate or an Associate of another;

(3)                       Whether a Person is acting in concert with another;

(4)                       Whether the assets subject to any Business Combination constitute a Substantial Part;

(5)                       Whether a proposed transaction is subject to the provisions of this Article; and

(6)                       Such other matters with respect to which a determination is required under this Article.

10




Any such determination shall be conclusive and binding for all purposes of this Article.

The affirmative vote required by this Article is in addition to the vote of the holders of any class or series of stock of the Company otherwise required by law, these Articles of Incorporation, any resolution which has been adopted by the Board of Directors providing for the issuance of a class or series of stock or any agreement between the Company and any national securities exchange.

ARTICLE XI

Amendment

The Company may amend these Articles of Incorporation if approved by each voting group entitled to vote thereon by a simple majority of all the votes entitled to be cast by that voting group at any regular meeting or special meeting duly called for that purpose in the manner prescribed by its Bylaws, provided, however, that Article X may not be repcaled or amended in any respect unless such action is approved by at least a ninety-five percent (95%) vote of the outstanding Voting Stock beneficially owned by shareholders other than any Major Stockholder, and provided further, that the board of Directors may, without shareholder approval, amend these Articles (i) to the extent permitted under the Washington Business Corporation Act or (ii) as necessary to designate the preferences, limitations, and relative rights of a class or series of shares of the Company prior to issuance of any shares in that class or series.

ARTICLE XII

Limitation of Liability

A director of the Company shall not be personally liable to the Company or its shareholders for monetary damages for conduct as a director (“Protected Conduct”). However, Protected Conduct shall exclude (i) acts or omissions which involve intentional misconduct by the director or a knowing violation of law by the director, (ii) any conduct violating Section 23B.08.310 of the Revised Code of Washington, and (iii), any transaction from which the director will personally receive a benefit in money, property or services to which the director is not legally entitled. If Washington law is amended to authorize corporate action further eliminating or limiting the personal liability of directors, then the liability of a director of the Company shall be eliminated or limited to the fullest extent permitted by Washington law, as so amended. Any repeal or modification of this Article XII by the shareholders of the Company shall not adversely

11




affect any right or protection of a director of the Company existing at the time of such repeal or modification.

ARTICLE XIII

The street address of the registered office of the Company is:

1201 Third Avenue
15th Floor
Seattle, Washington 98101

and the name of the registered agent at that address is:

Marc R. Kittner

ARTICLE XIV

Special Meetings of Shareholders

Special meetings of the shareholders for any purpose or purposes, unless otherwise prescribed by statute, may be called by the board of directors or by any other person or persons authorized to do so in the Company’s Bylaws. Notwithstanding RCW 23B.07.020(1) (b) or any other provision in these Articles or the Company’s Bylaws, a special meeting of the shareholders may be called by the shareholders only if the holders of at least twenty-five percent of all the votes to be cast on any issue proposed to be considered at the proposed special meeting sign, date and deliver to the Company’s secretary one or more written demands for the meeting describing the purpose or purposes for which it is to be held.

DATED at Seattle, Washington, on the 28th day of October, 1999.

WASHINGTON MUTUAL, INC.

 

 

 

 

 

 

 

By:

/s/ Kerry K. Killinger

 

 

 

Kerry K. Killinger

 

 

President, Chairman and Chief Executive Officer

 

12



EXHIBIT 31.1

CERTIFICATION

I, Kerry K. Killinger, certify that:

1.                 I have reviewed this quarterly report on Form 10 Q of Washington Mutual, Inc.;

2.                 Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.                 Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.                 The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)            Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b)           Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)            Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

(d)           Disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.                 The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)            All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)           Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 9, 2007

/s/ KERRY K. KILLINGER

 

Kerry K. Killinger

 

Chairman and Chief Executive Officer
of Washington Mutual, Inc.

 



EXHIBIT 31.2

CERTIFICATION

I, Thomas W. Casey, certify that:

1.                 I have reviewed this quarterly report on Form 10-Q of Washington Mutual, Inc.;

2.                 Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.                 Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.                 The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)            Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries , is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

(b)           Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)            Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

(d)           Disclosed in this quarterly report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5.                 The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)            All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)           Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: August 9, 2007

/s/ THOMAS W. CASEY

 

Thomas W. Casey

 

Executive Vice President and Chief Financial
Officer of Washington Mutual, Inc.

 



EXHIBIT 32.1

WASHINGTON MUTUAL, INC.
Certification of the Chief Executive Officer

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Kerry K. Killinger, the Chief Executive Officer of Washington Mutual, Inc., does hereby certify that this report on Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Washington Mutual, Inc.

Date:  August 9, 2007

By:

 

/s/ KERRY K. KILLINGER

 

 

Kerry K. Killinger
Chairman and Chief Executive Officer
of Washington Mutual, Inc.

 

A signed original of this written statement required by Section 906 has been provided to Washington Mutual , Inc. and will be retained by Washington Mutual , Inc. and furnished to the Securities and Exchange Commission or its staff upon request.



EXHIBIT 32.2

WASHINGTON MUTUAL, INC.
Certification of the Chief Financial Officer

Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, Thomas W. Casey, the Chief Financial Officer of Washington Mutual, Inc., does hereby certify that this report on Form 10-Q fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 and that the information contained in this report fairly presents, in all material respects, the financial condition and results of operations of Washington Mutual, Inc.

Date: August 9, 2007

By:

 

/s/ THOMAS W. CASEY

 

 

Thomas W. Casey

 

 

Executive Vice President and Chief Financial Officer

 

 

of Washington Mutual, Inc.

 

A signed original of this written statement required by Section 906 has been provided to Washington Mutual, Inc. and will be retained by Washington Mutual, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.



EXHIBIT 99.1

WASHINGTON MUTUAL, INC.

COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(dollars in millions)

 

Earnings, including interest on deposits (1) :

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

$

1,240

 

$

1,148

 

$

2,479

 

$

2,682

 

Fixed charges

 

2,756

 

2,922

 

5,726

 

5,509

 

 

 

$

3,996

 

$

4,070

 

$

8,205

 

$

8,191

 

Fixed charges (1)(2) :

 

 

 

 

 

 

 

 

 

Interest expense

 

$

2,714

 

$

2,875

 

$

5,641

 

$

5,416

 

Estimated interest component of net rental expense

 

42

 

47

 

85

 

93

 

 

 

$

2,756

 

$

2,922

 

$

5,726

 

$

5,509

 

Ratio of earnings to fixed charges

 

1.45

 

1.39

 

1.43

 

1.49

 

Earnings, excluding interest on deposits (1) :

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

$

1,240

 

$

1,148

 

$

2,479

 

$

2,682

 

Fixed charges

 

1,033

 

1,461

 

2,231

 

2,827

 

 

 

$

2,273

 

$

2,609

 

$

4,710

 

$

5,509

 

Fixed charges (1)(2) :

 

 

 

 

 

 

 

 

 

Interest expense

 

$

2,714

 

$

2,875

 

$

5,641

 

$

5,416

 

Less: interest on deposits

 

(1,723

)

(1,461

)

(3,495

)

(2,682

)

Estimated interest component of net rental expense

 

42

 

47

 

85

 

93

 

 

 

$

1,033

 

$

1,461

 

$

2,231

 

$

2,827

 

Ratio of earnings to fixed charges

 

2.20

 

1.79

 

2.11

 

1.95

 


(1)                  As defined in Item 503(d) of Regulation S-K.

(2)                  Fixed charges exclude interest expense on uncertain tax positions which is included as a component of income taxes in the Consolidated Statements of Income.



EXHIBIT 99.2

WASHINGTON MUTUAL, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PREFERRED DIVIDENDS

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2007

 

2006

 

2007

 

2006

 

 

 

(dollars in millions)

 

Earnings, including interest on deposits (1) :

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

$

1,240

 

$

1,148

 

$

2,479

 

$

2,682

 

Fixed charges

 

2,756

 

2,922

 

5,726

 

5,509

 

 

 

$

3,996

 

$

4,070

 

$

8,205

 

$

8,191

 

Preferred dividend requirement

 

$

8

 

$

 

$

15

 

$

 

Ratio of income from continuing operations before income taxes to income from continuing operations

 

1.49

 

1.51

 

1.54

 

1.55

 

Preferred dividends (2)

 

$

12

 

$

 

$

23

 

$

 

Fixed charges (1)(3) :

 

 

 

 

 

 

 

 

 

Interest expense

 

$

2,714

 

$

2,875

 

$

5,641

 

$

5,416

 

Estimated interest component of net rental expense

 

42

 

47

 

85

 

93

 

 

 

2,756

 

2,922

 

5,726

 

5,509

 

Fixed charges and preferred dividends

 

$

2,768

 

$

2,922

 

$

5,749

 

$

5,509

 

Ratio of earnings to fixed charges and preferred dividends

 

1.44

 

1.39

 

1.43

 

1.49

 

Earnings, excluding interest on deposits (1) :

 

 

 

 

 

 

 

 

 

Income from continuing operations before income taxes

 

$

1,240

 

$

1,148

 

$

2,479

 

$

2,682

 

Fixed charges

 

1,033

 

1,461

 

2,231

 

2,827

 

 

 

$

2,273

 

$

2,609

 

$

4,710

 

$

5,509

 

Preferred dividends (2)

 

$

12

 

$

 

$

23

 

$

 

Fixed charges (1)(3) :

 

 

 

 

 

 

 

 

 

Interest expense

 

$

2,714

 

$

2,875

 

$

5,641

 

$

5,416

 

Less: interest on deposits

 

(1,723

)

(1,461

)

(3,495

)

(2,682

)

Estimated interest component of net rental expense

 

42

 

47

 

85

 

93

 

 

 

1,033

 

1,461

 

2,231

 

2,827

 

Fixed charges and preferred dividends

 

$

1,045

 

$

1,461

 

$

2,254

 

$

2,827

 

Ratio of earnings to fixed charges and preferred dividends

 

2.18

 

1.79

 

2.09

 

1.95

 


(1)                  As defined in Item 503(d) of Regulation S-K.

(2)                  The preferred dividends were increased to amounts representing the pretax earnings that would be required to cover such dividend requirements.

(3)                  Fixed charges exclude interest expense on uncertain tax positions which is included as a component of income taxes in the Consolidated Statements of Income.