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

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004

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)

        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, 2004:

Common Stock — 870,898,848(1)
 (1) Includes 6,000,000 shares held in escrow.


WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2004

TABLE OF CONTENTS

 
   Page
PART I — Financial Information   1
  Item 1. Financial Statements   1
    Consolidated Statements of Income —
Three Months Ended March 31, 2004 and 2003 (Restated)		   1
    Consolidated Statements of Financial Condition —
March 31, 2004 and December 31, 2003		   3
    Consolidated Statements of Stockholders' Equity and Comprehensive Income —
Three Months Ended March 31, 2004 and 2003 (Restated)		   4
    Consolidated Statements of Cash Flows —
Three Months Ended March 31, 2004 and 2003 (Restated)		   5
    Notes to Consolidated Financial Statements   7
  Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations   18
    Cautionary Statements   18
    Overview   19
    Controls and Procedures   20
    Critical Accounting Policies   20
    Summary Financial Data   22
    Earnings Performance from Continuing Operations   23
    Review of Financial Condition   32
    Operating Segments   35
    Off-Balance Sheet Activities   39
    Asset Quality   40
    Liquidity   43
    Capital Adequacy   45
    Market Risk Management   45
    Maturity and Repricing Information   49
  Item 3. Quantitative and Qualitative Disclosures About Market Risk   45
  Item 4. Controls and Procedures   20

PART II — Other Information
 
57
  Item 2. Changes in Securities and Use of Proceeds   57
  Item 4. Submission of Matters to a Vote of Security Holders   57
  Item 6. Exhibits and Reports on Form 8-K   57

i


PART I — FINANCIAL INFORMATION

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

 
   Three Months Ended March 31,
  
 
   2004
   (Restated)
2003
  
 
   (in millions, except per share amounts)

  
Interest Income              
  Loans held for sale   $ 328   $ 668  
  Loans held in portfolio     2,071     1,964  
  Available-for-sale securities     265     516  
  Other interest and dividend income     57     80  
   
 
 
    Total interest income     2,721     3,228  
Interest Expense              
  Deposits     443     587  
  Borrowings     546     648  
   
 
 
    Total interest expense     989     1,235  
   
 
 
      Net interest income     1,732     1,993  
  Provision for loan and lease losses     56     88  
   
 
 
    Net interest income after provision for loan and lease losses     1,676     1,905  
Noninterest Income              
  Home loan mortgage banking income (expense):              
    Loan servicing fees     502     613  
    Amortization of mortgage servicing rights     (750 )   (969 )
    Mortgage servicing rights (impairment) recovery     (606 )   37  
    Revaluation gain from derivatives     1,042     217  
    Net settlement income from certain interest-rate swaps     167     140  
    Gain from mortgage loans     171     643  
    Other home loan mortgage banking income (expense), net     5     (56 )
   
 
 
      Total home loan mortgage banking income     531     625  
  Depositor and other retail banking fees     463     420  
  Securities fees and commissions     107     89  
  Insurance income     61     46  
  Portfolio loan related income     87     117  
  Gain (loss) from other available-for-sale securities     21     (5 )
  Loss on extinguishment of borrowings     (89 )   (87 )
  Other income     56     90  
   
 
 
    Total noninterest income     1,237     1,295  
Noninterest Expense              
  Compensation and benefits     899     748  
  Occupancy and equipment     400     301  
  Telecommunications and outsourced information services     123     140  
  Depositor and other retail banking losses     55     52  
  Amortization of other intangible assets     15     16  
  Advertising and promotion     58     59  
  Professional fees     39     54  
  Other expense     291     277  
   
 
 
    Total noninterest expense     1,880     1,647  
   
 
 
      Income from continuing operations before income taxes     1,033     1,553  
      Income taxes     385     575  
   
 
 
        Income from continuing operations, net of taxes     648     978  
   
 
 
Discontinued Operations              
      Income (loss) from discontinued operations before income taxes     (32 )   30  
      Gain on disposition of discontinued operations     676     –  
      Income taxes     245     11  
   
 
 
        Income from discontinued operations, net of taxes     399     19  
   
 
 
Net Income   $ 1,047   $ 997  
   
 
 

(This table is continued on the next page.)

See Notes to Consolidated Financial Statements.

1

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

(This table is continued from the previous page.)

 
   Three Months Ended March 31,
 
   2004
   (Restated)
2003
 
   (in millions, except per share amounts)
Basic Earnings Per Common Share:            
  Income from continuing operations   $ 0.75   $ 1.06
  Income from discontinued operations, net     0.46     0.02
   
 
  Net income     1.21     1.08
Diluted Earnings Per Common Share:            
  Income from continuing operations   $ 0.73   $ 1.05
  Income from discontinued operations, net     0.45     0.02
   
 
  Net income     1.18     1.07

Dividends declared per common share
 
 
0.42
 
 
0.29
Basic weighted average number of common shares outstanding (in thousands)     863,299     921,084
Diluted weighted average number of common shares outstanding (in thousands)     886,467     934,889

See Notes to Consolidated Financial Statements.

2


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

 
   March 31,
2004
   December 31,
2003
  
 
   (dollars in millions)

  
Assets              
  Cash and cash equivalents   $ 6,045   $ 7,018  
  Federal funds sold and securities purchased under agreements to resell     1,783     19  
  Available-for-sale securities, total amortized cost of $22,843 and $36,858:              
    Mortgage-backed securities (including assets pledged of $3,199 and $3,642)     10,766     10,695  
    Investment securities (including assets pledged of $11,369 and $19,353)     12,565     26,012  
   
 
 
      Total available-for-sale securities     23,331     36,707  
  Loans held for sale     33,125     20,343  
  Loans held in portfolio     187,462     175,644  
  Allowance for loan and lease losses     (1,260 )   (1,250 )
   
 
 
      Total loans held in portfolio, net of allowance for loan and lease losses     186,202     174,394  
  Investment in Federal Home Loan Banks     3,916     3,462  
  Mortgage servicing rights     5,239     6,354  
  Goodwill     6,196     6,196  
  Assets of discontinued operations     –     4,184  
  Other assets     14,931     16,501  
   
 
 
      Total assets   $ 280,768   $ 275,178  
   
 
 

Liabilities
 
 
 
 
 
 
 
  Deposits:              
    Noninterest-bearing deposits   $ 35,714   $ 29,968  
    Interest-bearing deposits     125,267     123,213  
   
 
 
      Total deposits     160,981     153,181  
  Federal funds purchased and commercial paper     4,501     2,011  
  Securities sold under agreements to repurchase     18,306     28,333  
  Advances from Federal Home Loan Banks     58,494     48,330  
  Other borrowings     13,692     15,483  
  Liabilities of discontinued operations     –     3,578  
  Other liabilities     4,411     4,520  
   
 
 
      Total liabilities     260,385     255,436  

Stockholders' Equity
 
 
 
 
 
 
 
  Common stock, no par value: 1,600,000,000 shares authorized, 868,953,490 and 880,985,764 shares issued and outstanding     –     –  
  Capital surplus — common stock     3,131     3,682  
  Accumulated other comprehensive loss     (12 )   (524 )
  Retained earnings     17,264     16,584  
   
 
 
      Total stockholders' equity     20,383     19,742  
   
 
 
      Total liabilities and stockholders' equity   $ 280,768   $ 275,178  
   
 
 

See Notes to Consolidated Financial Statements.

3


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, 2002 (Restated)   944.0   $ 5,961   $ 175   $ 13,925   $ 20,061  
Comprehensive income:                              
  Net income   –     –     –     997     997  
  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 from cash flow hedging instruments   –     –     14     –     14  
    Minimum pension liability adjustment   –     –     (4 )   –     (4 )
                         
 
Total comprehensive income                           1,116  
Cash dividends declared on common stock   –     –     –     (267 )   (267 )
Cash dividends returned(1)   –     –     –     2     2  
Common stock repurchased and retired   (10.2 )   (351 )   –     –     (351 )
Common stock returned from escrow   (0.4 )   –     –     –     –  
Common stock issued   1.6     47     –     –     47  
   
 
 
 
 
 
BALANCE, March 31, 2003 (Restated)   935.0   $ 5,657   $ 294   $ 14,657   $ 20,608  
   
 
 
 
 
 

BALANCE, December 31, 2003
 
881.0
 
$
3,682
 
$
(524
)
$
16,584
 
$
19,742
 
Comprehensive income:                              
  Net income   –     –     –     1,047     1,047  
  Other comprehensive income (loss), net of tax:                              
    Net unrealized gain from securities arising during the period, net of reclassification adjustments   –     –     388     –     388  
    Net unrealized gain from cash flow hedging instruments   –     –     130     –     130  
    Minimum pension liability adjustment   –     –     (6 )   –     (6 )
                         
 
Total comprehensive income                           1,559  
Cash dividends declared on common stock   –     –     –     (367 )   (367 )
Common stock repurchased and retired   (16.1 )   (712 )   –     –     (712 )
Common stock issued   4.1     161     –     –     161  
   
 
 
 
 
 
BALANCE, March 31, 2004   869.0   $ 3,131   $ (12 ) $ 17,264   $ 20,383  
   
 
 
 
 
 
(1)
Represents accumulated dividends on shares returned from escrow.

See Notes to Consolidated Financial Statements.

4


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

 
   Three Months Ended
March 31,
  
 
   2004
   (Restated)
2003
  
 
   (in millions)

  
Cash Flows from Operating Activities              
  Net income   $ 1,047   $ 997  
  Income from discontinued operations, net of taxes     (399 )   (19 )
   
 
 
    Income from continuing operations     648     978  
  Adjustments to reconcile income from continuing operations to net cash used by operating activities:              
    Provision for loan and lease losses     56     88  
    Gain from mortgage loans     (171 )   (643 )
    (Gain) loss from securities     (21 )   4  
    Revaluation gain from derivatives     (1,042 )   (217 )
    Loss on extinguishment of borrowings     89     87  
    Depreciation and amortization     916     1,074  
    Mortgage servicing rights impairment (recovery)     606     (37 )
    Stock dividends from Federal Home Loan Banks     (27 )   (40 )
    Origination and purchases of loans held for sale, net of principal payments     (32,813 )   (85,533 )
    Proceeds from sales of loans held for sale     18,962     74,095  
    Decrease in other assets     2,975     2,823  
    Decrease in other liabilities     (603 )   (2,504 )
   
 
 
      Net cash used by operating activities     (10,425 )   (9,825 )
Cash Flows from Investing Activities              
  Purchases of securities     (11 )   (186 )
  Proceeds from sales and maturities of mortgage-backed securities     255     101  
  Proceeds from sales and maturities of other available-for-sale securities     14,027     6  
  Principal payments on securities     860     2,393  
  Purchases of Federal Home Loan Bank stock     (441 )   (279 )
  Redemption of Federal Home Loan Bank stock     14     151  
  Proceeds from sale of mortgage servicing rights     –     141  
  Origination and purchases of loans held in portfolio     (28,847 )   (23,335 )
  Principal payments on loans held in portfolio     16,624     19,779  
  Proceeds from sales of loans held in portfolio     197     –  
  Proceeds from sales of foreclosed assets     123     121  
  Net (increase) decrease in federal funds sold and securities purchased under agreements to resell     (1,764 )   409  
  Purchases of premises and equipment, net     (214 )   (272 )
  Proceeds from sale of discontinued operations, net of cash sold     1,223     –  
   
 
 
      Net cash provided (used) by investing activities     2,046     (971 )

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

See Notes to Consolidated Financial Statements.

5


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

(Continued from the previous page.)

 
   Three Months Ended
March 31,
  
 
   2004
   (Restated)
2003
  
 
   (in millions)

  
Cash Flows from Financing Activities              
  Net increase in deposits   $ 7,800   $ 4,356  
  Net (decrease) increase in short-term borrowings     (10,910 )   3,106  
  Proceeds from long-term borrowings     1,475     3,456  
  Repayments of long-term borrowings     (100 )   (1,429 )
  Proceeds from advances from Federal Home Loan Banks