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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 MARCH 31, 2003

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   91-1653725
(State or other jurisdiction of
incorporation or organization)		   (I.R.S. Employer
Identification Number)

1201 Third Avenue, Seattle, Washington
 
98101
(Address of principal executive offices)   (Zip Code)

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

        Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý    No o

        Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý    No o

        The number of shares outstanding of the issuer's classes of common stock as of April 30, 2003:

Common Stock – 930,486,541(1)

(1) Includes 17,325,000 shares held in escrow pending resolution of the Company's asserted right to the return of such shares.


WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2003

TABLE OF CONTENTS

 
   Page
PART I Financial Information   1
  Item 1. Financial Statements   1
    Consolidated Statements of Income –
Three Months Ended March 31, 2003 and 2002		   1
    Consolidated Statements of Financial Condition –
March 31, 2003 and December 31, 2002		   2
    Consolidated Statements of Stockholders' Equity and Comprehensive Income –
Three Months Ended March 31, 2003 and 2002		   3
    Consolidated Statements of Cash Flows –
Three Months Ended March 31, 2003 and 2002		   4
    Notes to Consolidated Financial Statements   6

 
 
 
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
14
    Cautionary Statements   14
    Controls and Procedures   14
    Critical Accounting Policies   14
    Summary Financial Data   17
    Earnings Performance   18
    Review of Financial Condition   27
    Off-Balance Sheet Activities   31
    Asset Quality   33
    Operating Segments   37
    Liquidity   40
    Capital Adequacy   42
    Market Risk Management   42
    Maturity and Repricing Information   47
    Recently Issued Accounting Standards   53
  Item 3. Quantitative and Qualitative Disclosures About Market Risk   42
  Item 4. Controls and Procedures   14

 
 
 

PART II Other Information
 
54
  Item 4. Submission of Matters to a Vote of Security Holders   54
  Item 6. Exhibits and Reports on Form 8-K   54

i


PART I – FINANCIAL INFORMATION

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

 
   Three Months Ended March 31,
  
 
   2003
   2002
  
 
   (in millions, except
per share amounts)

  
Interest Income              
  Loans held for sale   $ 589   $ 443  
  Loans held in portfolio     2,106     2,411  
  Available-for-sale securities     517     947  
  Other interest and dividend income     80     82  
   
 
 
    Total interest income     3,292     3,883  
Interest Expense              
  Deposits     587     651  
  Borrowings     688     836  
   
 
 
    Total interest expense     1,275     1,487  
   
 
 
    Net interest income     2,017     2,396  
  Provision for loan and lease losses     125     175  
   
 
 
    Net interest income after provision for loan and lease losses     1,892     2,221  
Noninterest Income              
  Home loan mortgage banking income (expense):              
    Loan servicing fees     613     540  
    Amortization of mortgage servicing rights     (969 )   (479 )
    Mortgage servicing rights recovery     37     45  
    Revaluation gain (loss) from derivatives     217     (15 )
    Net settlement income from certain interest-rate swaps     140     6  
    Gain from mortgage loans     587     251  
    Other home loan mortgage banking income, net     98     39  
   
 
 
      Total home loan mortgage banking income     723     387  
  Depositor and other retail banking fees     420     361  
  Securities fees and commissions     89     82  
  Insurance income     52     47  
  Portfolio loan related income     117     65  
  Loss from other available-for-sale securities     (5 )   (298 )
  (Loss) gain on extinguishment of securities sold under agreements to repurchase     (87 )   74  
  Other income     97     90  
   
 
 
    Total noninterest income     1,406     808  
Noninterest Expense              
  Compensation and benefits     771     690  
  Occupancy and equipment     304     288  
  Telecommunications and outsourced information services     144     139  
  Depositor and other retail banking losses     52     50  
  Amortization of other intangible assets     16     17  
  Advertising and promotion     63     44  
  Professional fees     56     55  
  Other expense     303     238  
   
 
 
    Total noninterest expense     1,709     1,521  
   
 
 
    Income before income taxes     1,589     1,508  
  Income taxes     586     552  
   
 
 
Net Income   $ 1,003   $ 956  
   
 
 
Net Income Attributable to Common Stock   $ 1,003   $ 954  
   
 
 
Net income per common share:              
  Basic   $ 1.09   $ 1.01  
  Diluted     1.07     0.99  
Dividends declared per common share     0.29     0.25  
Basic weighted average number of common shares outstanding (in thousands)     921,084     947,653  
Diluted weighted average number of common shares outstanding (in thousands)     934,889     963,242  

See Notes to Consolidated Financial Statements.

1


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

 
   March 31,
2003
   December 31,
2002
  
 
   (dollars in millions)

  
Assets              
  Cash and cash equivalents   $ 6,295   $ 7,208  
  Federal funds sold and securities purchased under resale agreements     1,606     2,015  
  Available-for-sale securities, total amortized cost of $40,816 and $42,592:              
    Mortgage-backed securities (including assets pledged of $7,802 and $6,570)     26,768     28,375  
    Investment securities (including assets pledged of $12,901 and $10,679)     15,635     15,597  
   
 
 
      42,403     43,972  
  Loans held for sale     44,014     33,996  
  Loans held in portfolio     150,557     147,528  
  Allowance for loan and lease losses     (1,680 )   (1,653 )
   
 
 
      Total loans held in portfolio, net of allowance for loan and lease losses     148,877     145,875  
  Investment in Federal Home Loan Banks     3,871     3,703  
  Mortgage servicing rights     5,210     5,341  
  Goodwill     6,253     6,270  
  Other assets     18,441     19,918  
   
 
 
      Total assets   $ 276,970   $ 268,298  
   
 
 

Liabilities
 
 
 
 
 
 
 
  Deposits:              
    Noninterest-bearing deposits   $ 40,478   $ 37,515  
    Interest-bearing deposits     119,394     118,001  
   
 
 
      Total deposits     159,872     155,516  
  Federal funds purchased and commercial paper     2,214     1,247  
  Securities sold under agreements to repurchase     20,502     16,717  
  Advances from Federal Home Loan Banks     52,221     51,265  
  Other borrowings     15,725     15,264  
  Other liabilities     5,749     8,155  
   
 
 
      Total liabilities     256,283     248,164  

Stockholders' Equity
 
 
 
 
 
 
 
  Common stock, no par value: 1,600,000,000 shares authorized, 934,983,408 and 944,046,787 shares issued and outstanding     –     –  
  Capital surplus – common stock     5,657     5,961  
  Accumulated other comprehensive income     294     175  
  Retained earnings     14,736     13,998  
   
 
 
      Total stockholders' equity     20,687     20,134  
   
 
 
      Total liabilities and stockholders' equity   $ 276,970   $ 268,298  
   
 
 

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, 2001   873.1   $ 3,178   $ (243 ) $ 11,128   $ 14,063  
Comprehensive income:                              
  Net income   –     –     –     956     956  
  Other comprehensive income (loss), net of tax:                              
    Net unrealized loss from securities arising during the period, net of reclassification adjustments   –     –     (480 )   –     (480 )
    Net unrealized gain on cash flow hedging instruments   –     –     70     –     70  
    Minimum pension liability adjustment   –     –     (2 )   –     (2 )
                         
 
Total comprehensive income                           544  
Cash dividends declared on common stock   –     –     –     (243 )   (243 )
Cash dividends declared on redeemable preferred stock   –     –     –     (2 )   (2 )
Common stock issued for acquisitions   96.4     3,685     –     –     3,685  
Common stock issued   4.1     86     –     –     86  
   
 
 
 
 
 
BALANCE, March 31, 2002   973.6   $ 6,949   $ (655 ) $ 11,839   $ 18,133  
   
 
 
 
 
 

BALANCE, December 31, 2002
 
944.0
 
$
5,961
 
$
175
 
$
13,998
 
$
20,134
 
Comprehensive income:                              
  Net income   –     –     –     1,003     1,003  
  Other comprehensive income (loss), net of tax:                              
    Net unrealized gain from securities arising during the period, net of reclassification adjustments   –     –     109     –     109  
    Net unrealized gain on cash flow hedging instruments   –     –     14     –     14  
    Minimum pension liability adjustment   –     –     (4 )   –     (4 )
                         
 
Total comprehensive income                           1,122  
Cash dividends declared on common stock   –     –     –     (265 )   (265 )
Common stock repurchased and retired   (10.6 )   (351 )   –     –     (351 )
Common stock issued   1.6     47     –     –     47  
   
 
 
 
 
 
BALANCE, March 31, 2003   935.0   $ 5,657   $ 294   $ 14,736   $ 20,687  
   
 
 
 
 
 

See Notes to Consolidated Financial Statements.

3


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

 
   Three Months Ended
March 31,
  
 
   2003
   2002
  
 
   (in millions)

  
Cash Flows from Operating Activities              
  Net income   $ 1,003   $ 956  
  Adjustments to reconcile net income to net cash (used) provided by operating
  activities:		              
    Provision for loan and lease losses     125     175  
    Gain from mortgage loans     (587 )   (251 )
    Loss from securities     4     296  
    Revaluation (gain) loss from derivatives     (211 )   15  
    Loss (gain) on extinguishment of securities sold under agreements to
  repurchase		     87     (74 )
    Depreciation and amortization     1,076     670  
    Mortgage servicing rights recovery     (37 )   (45 )
    Stock dividends from Federal Home Loan Banks     (40 )   (58 )
    Origination and purchases of loans held for sale, net of principal payments     (83,011 )   (44,790 )
    Proceeds from sales of loans held for sale     72,703     54,440  
    Decrease (increase) in other assets     1,700     (74 )
    Decrease in other liabilities     (2,488 )   (528 )
   
 
 
      Net cash (used) provided by operating activities     (9,676 )   10,732  
Cash Flows from Investing Activities              
  Purchases of securities     (186 )   (30,685 )
  Proceeds from sales and maturities of mortgage-backed securities     101     3,604  
  Proceeds from sales and maturities of other available-for-sale securities     15     15,884  
  Principal payments on securities     2,393     2,879  
  Purchases of investment in Federal Home Loan Banks     (279 )   (4 )
  Redemption of investment in Federal Home Loan Banks     151     41  
  Proceeds from sales of mortgage servicing rights     141     –  
  Origination and purchases of loans held in portfolio     (24,046 )   (20,573 )
  Principal payments on loans held in portfolio     20,376     18,906  
  Proceeds from sales of foreclosed assets     121     67  
  Net decrease in federal funds sold and securities purchased under resale
  agreements		     409     169  
  Net cash used for acquisitions     –     (2,215 )
  Purchases of premises and equipment, net     (273 )   (126 )
   
 
 
    Net cash used by investing activities   $ (1,077 ) $ (12,053 )

(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
(Unaudited)

(Continued from the previous page.)

 
   Three Months Ended
March 31,
  
 
   2003
   2002
  
 
   (in millions)

  
Cash Flows from Financing Activities              
  Increase in deposits     4,356     6,657  
  Increase (decrease) in short-term borrowings     3,167     (5,267 )
  Proceeds from long-term borrowings     3,456     13,367  
  Repayments of long-term borrowings     (1,527 )   (3,842 )
  Proceeds from advances from Federal Home Loan Banks     22,919     17,874  
  Repayments of advances from Federal Home Loan Banks     (21,958 )   (25,125 )
  Cash dividends paid on preferred and common stock     (265 )   (245 )
  Repurchase of common stock     (351 )   –  
  Other     43     79  
   
 
 
    Net cash provided by financing activities     9,840     3,498  
   
 
 
    (Decrease) increase in cash and cash equivalents     (913 )   2,177  
    Cash and cash equivalents, beginning of period     7,208     3,563  
   
 
 
    Cash and cash equivalents, end of period   $ 6,295   $ 5,740  
   
 
 
Noncash Activities              
  Loans exchanged for mortgage-backed securities   $ 544   $ 944  
  Real estate acquired through foreclosure     122     102  
Cash Paid During the Period for              
  Interest on deposits     540     524  
  Interest on borrowings     669     814  
  Income taxes     1,614     934  

See Notes to Consolidated Financial Statements.

5


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

Note 1: Accounting Policies

    Basis of Presentation

        The accompanying Consolidated Financ