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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)


ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

or


o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM                          TO                         :

Commission File Number 1-14667

WASHINGTON MUTUAL, INC.
(Exact name of registrant as specified in its charter)

Washington
(State or Other Jurisdiction of
Incorporation or Organization)		   91-1653725
(I.R.S. Employer
Identification Number)

1201 Third Avenue, Seattle, Washington
(Address of Principal Executive Offices)
 
98101
(Zip Code)

(206) 461-2000
(Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

        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 ý    No o

        The number of shares outstanding of the issuer's classes of common stock as of October 31, 2002:

        Common Stock – 945,677,148(1)

(1) Includes 18,000,000 shares held in escrow.


WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2002

TABLE OF CONTENTS

 
   Page
PART I    
  Item 1. Financial Statements   1
    Consolidated Statements of Income –
Three and Nine Months Ended September 30, 2002 and 2001		   1
    Consolidated Statements of Financial Condition –
September 30, 2002 and December 31, 2001		   2
    Consolidated Statements of Stockholders' Equity and Comprehensive Income –
Nine Months Ended September 30, 2002 and 2001		   3
    Consolidated Statements of Cash Flows –
Nine Months Ended September 30, 2002 and 2001		   4
    Notes to Consolidated Financial Statements   5
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
16
    Summary Financial Data   16
    Controls and Procedures   17
    Cautionary Statements   17
    Overview   18
    Critical Accounting Policies   19
    Recently Issued Accounting Standards   19
    Earnings Performance   20
    Review of Financial Condition   28
    Off-Balance Sheet Activities   33
    Asset Quality   34
    Operating Segments   37
    Liquidity   39
    Capital Adequacy   40
    Market Risk Management   41
    Maturity and Repricing Information   46
  Item 3. Market Risk Management   41
  Item 4. Controls and Procedures   17

PART II Other Information
 
 
  Item 6. Exhibits and Reports on Form 8-K   51

        The information furnished in these interim statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for such periods. Such adjustments are of a normal recurring nature, unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year. The interim financial information should be read in conjunction with Washington Mutual, Inc.'s 2001 Annual Report on Form 10-K.

i



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

 
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
  
 
   2002
   2001
   2002
   2001
  
 
   (in millions, except per share amounts)

  
Interest Income                          
  Loans   $ 2,675   $ 2,808   $ 8,225   $ 8,543  
  Available-for-sale ("AFS") securities     652     825     2,411     2,797  
  Other interest and dividend income     86     57     245     200  
   
 
 
 
 
    Total interest income     3,413     3,690     10,881     11,540  
Interest Expense                          
  Deposits     676     735     1,988     2,445  
  Borrowings     818     1,139     2,478     4,246  
   
 
 
 
 
    Total interest expense     1,494     1,874     4,466     6,691  
   
 
 
 
 
    Net interest income     1,919     1,816     6,415     4,849  
  Provision for loan and lease losses     135     200     470     375  
   
 
 
 
 
    Net interest income after provision for loan and lease losses     1,784     1,616     5,945     4,474  
Noninterest Income                          
  Depositor and other retail banking fees     426     333     1,185     937  
  Securities fees and commissions     92     78     272     226  
  Insurance income     46     22     132     65  
  Single-family residential ("SFR") mortgage banking (expense) income     (1,575 )   (131 )   (1,915 )   407  
  Portfolio loan related income     85     49     226     134  
  Gain from other AFS securities     356     253     195     209  
  Revaluation gain (loss) from derivatives     1,582     (2 )   2,423     (4 )
  Gain on extinguishment of securities sold under agreements to repurchase ("repurchase agreements")     98     125     293     125  
  Net settlement income from certain interest-rate swaps     116     –     224     –  
  Other income     154     136     361     319  
   
 
 
 
 
    Total noninterest income     1,380     863     3,396     2,418  
Noninterest Expense                          
  Compensation and benefits     719     507     2,141     1,389  
  Occupancy and equipment     289     202     859     576  
  Telecommunications and outsourced information services     136     111     409     322  
  Depositor and other retail banking losses     55     37     153     99  
  Amortization of goodwill     –     31     –     76  
  Amortization of other intangible assets     25     17     77     51  
  Professional fees     55     51     161     139  
  Advertising and promotion     75     52     188     135  
  Other expense     271     146     762     499  
   
 
 
 
 
    Total noninterest expense     1,625     1,154     4,750     3,286  
   
 
 
 
 
    Income before income taxes     1,539     1,325     4,591     3,606  
  Income taxes     563     493     1,680     1,334  
   
 
 
 
 
Net Income   $ 976   $ 832   $ 2,911   $ 2,272  
   
 
 
 
 
Net Income Attributable to Common Stock   $ 975   $ 830   $ 2,906   $ 2,267  
   
 
 
 
 
Net income per common share:                          
  Basic   $ 1.03   $ 0.97   $ 3.06   $ 2.67  
  Diluted     1.01     0.94     3.01     2.63  
Dividends declared per common share     0.27     0.23     0.78     0.66  
Basic weighted average number of common shares outstanding (in thousands)     947,293     859,497     949,868     848,301  
Diluted weighted average number of common shares outstanding (in thousands)     963,422     879,374     966,938     863,206  

See Notes to Consolidated Financial Statements.

1


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

 
   September 30,
2002
   December 31,
2001
  
 
   (dollars in millions)

  
Assets              
  Cash and cash equivalents   $ 5,122   $ 3,563  
  Federal funds sold and securities purchased under resale agreements     2,413     2,481  
  AFS securities, total amortized cost of $44,563 and $58,783:              
    Encumbered     22,976     38,649  
    Unencumbered     23,616     19,700  
   
 
 
      46,592     58,349  
  Loans held for sale     26,440     23,842  
  Loans held in portfolio     150,930     132,991  
  Allowance for loan and lease losses     (1,705 )   (1,404 )
   
 
 
      Total loans held in portfolio, net of allowance for loan and lease losses     149,225     131,587  
  Investment in Federal Home Loan Banks ("FHLBs")     3,792     3,873  
  Mortgage servicing rights ("MSR")     4,548     6,241  
  Goodwill     6,059     1,981  
  Other assets     18,414     10,589  
   
 
 
      Total assets   $ 262,605   $ 242,506  
   
 
 
Liabilities              
  Deposits:              
    Noninterest-bearing deposits   $ 27,639   $ 22,441  
    Interest-bearing deposits     112,969     84,741  
   
 
 
      Total deposits     140,608     107,182  
  Federal funds purchased and commercial paper     1,845     4,690  
  Repurchase agreements     22,381     39,447  
  Advances from FHLBs     55,752     61,182  
  Other borrowings     13,415     12,576  
  Other liabilities     8,443     3,264  
   
 
 
      Total liabilities     242,444     228,341  
  Redeemable preferred stock     –     102  

Stockholders' Equity
 
 
 
 
 
 
 
  Common stock, no par value: 1,600,000,000 shares authorized, 953,752,443 and 873,089,120 shares issued and outstanding     –     –  
  Capital surplus – common stock     6,283     3,178  
  Accumulated other comprehensive income (loss)     601     (243 )
  Retained earnings     13,277     11,128  
   
 
 
    Total stockholders' equity     20,161     14,063  
   
 
 
    Total liabilities, redeemable preferred stock, and stockholders' equity   $ 262,605   $ 242,506  
   
 
 

See Notes to Consolidated Financial Statements.

2


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

 
   Number
of
Shares
   Capital
Surplus-
Common
Stock
   Accumulated
Other Comprehensive
Income (Loss)
   Retained Earnings
   Total
  
 
   (in millions)

  
BALANCE, December 31, 2000   809.8   $ 1,425   $ (54 ) $ 8,795   $ 10,166  
Comprehensive income:                              
  Net income   –     –     –     2,272     2,272  
  Other comprehensive income, net of tax:                              
    Net unrealized gain from securities arising during the period, net of reclassification adjustments   –     –     798     –     798  
    Net unrealized loss on cash flow hedging instruments   –     –     (104 )   –     (104 )
                         
 
Total comprehensive income                           2,966  
Cash dividends declared on common stock   –     –     –     (564 )   (564 )
Cash dividends declared on redeemable preferred stock   –     –     –     (5 )   (5 )
Common stock warrants issued, net of issuance costs   –     398     –     –     398  
Common stock issued for acquisitions   63.9     1,389     –     –     1,389  
Common stock issued   6.1     179     –     –     179  
   
 
 
 
 
 
BALANCE, September 30, 2001   879.8   $ 3,391   $ 640   $ 10,498   $ 14,529  
   
 
 
 
 
 
BALANCE, December 31, 2001   873.1   $ 3,178   $ (243 ) $ 11,128   $ 14,063  
Comprehensive income:                              
  Net income   –     –     –     2,911     2,911  
  Other comprehensive income, net of tax:                              
    Net unrealized gain from securities arising during the period, net of reclassification adjustments   –     –     1,528     –     1,528  
    Net unrealized loss on cash flow hedging instruments   –     –     (682 )   –     (682 )
    Minimum pension liability adjustment   –     –     (2 )   –     (2 )
                         
 
Total comprehensive income                           3,755  
Cash dividends declared on common stock   –     –     –     (757 )   (757 )
Cash dividends declared on redeemable preferred stock   –     –     –     (5 )   (5 )
Common stock repurchased and retired   (27.1 )   (942 )   –     –     (942 )
Common stock issued for acquisitions   96.4     3,672     –     –     3,672  
Fair value of Dime stock options   –     90     –     –     90  
Common stock issued to redeem preferred stock   4.3     102     –     –     102  
Common stock issued   7.1     183     –     –     183  
   
 
 
 
 
 
BALANCE, September 30, 2002   953.8   $ 6,283   $ 601   $ 13,277   $ 20,161  
   
 
 
 
 
 

See Notes to Consolidated Financial Statements.

3


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

 
   Nine Months Ended
September 30,
  
 
   2002
   2001
  
 
   (in millions)

  
Cash Flows from Operating Activities              
  Net income   $ 2,911   $ 2,272  
  Adjustments to reconcile net income to net cash provided (used) by operating activities:              
    Provision for loan and lease losses     470     375  
    Gain from mortgage loans     (889 )   (677 )
    Gain from securities     (214 )   (309 )
    Revaluation (gain) loss from derivatives     (2,423 )   4  
    Gain on extinguishment of repurchase agreements     (293 )   (125 )
    Depreciation and amortization     2,173     1,014  
    MSR impairment     2,911     692  
    Stock dividends from FHLBs     (153 )   (167 )
    Origination and purchases of loans held for sale, net of principal payments     (139,197 )   (79,892 )
    Proceeds from sales of loans held for sale     137,165     70,167  
    (Increase) decrease in other assets     (1,653 )   1,278  
    Increase in other liabilities     1,824     342  
   
 
 
      Net cash provided (used) by operating activities     2,632     (5,026 )
Cash Flows from Investing Activities              
  Purchases of securities     (45,940 )   (24,698 )
  Proceeds from sales of mortgage-backed securities ("MBS")     6,257     14,543  
  Proceeds from sales and maturities of other AFS securities     53,698     17,247  
  Principal payments on securities     6,763     8,480  
  Purchases of investment in FHLBs     (4 )   (8 )
  Redemption of investment in FHLBs     668     –  
  Proceeds from sale of MSR     822     115  
  Origination and purchases of loans, net of principal payments     (8,023 )   (980 )
  Proceeds from sales of loans     5,046     –  
  Proceeds from sales of foreclosed assets     252     194  
  Net decrease in federal funds sold and securities purchased under resale agreements     68     65  
  Net cash used for acquisitions     (2,215 )   (13,693 )