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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 JUNE 30, 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 July 30, 2004:

Common Stock – 872,552,275(1)

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


WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED JUNE 30, 2004

TABLE OF CONTENTS

 
   Page
PART I – Financial Information   1
  Item 1. Financial Statements   1
    Consolidated Statements of Income –
Three and Six Months Ended June 30, 2004 and 2003 (Restated)		   1
    Consolidated Statements of Financial Condition –
June 30, 2004 and December 31, 2003		   3
    Consolidated Statements of Stockholders' Equity and Comprehensive Income –
Six Months Ended June 30, 2004 and 2003 (Restated)		   4
    Consolidated Statements of Cash Flows –
Six Months Ended June 30, 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
 
22
    Cautionary Statements   22
    Overview   23
    Controls and Procedures   25
    Critical Accounting Policies   25
    Recently Issued Accounting Standards   26
    Summary Financial Data   27
    Earnings Performance from Continuing Operations   28
    Review of Financial Condition   40
    Operating Segments   42
    Off-Balance Sheet Activities   46
    Asset Quality   47
    Liquidity   50
    Capital Adequacy   52
    Market Risk Management   52
    Maturity and Repricing Information   56
  Item 3. Quantitative and Qualitative Disclosures About Market Risk   52
  Item 4. Controls and Procedures   25

PART II – Other Information
 
62
  Item 1. Legal Proceedings   62
  Item 2. Changes in Securities and Use of Proceeds   62
  Item 4. Submission of Matters to a Vote of Security Holders   63
  Item 6. Exhibits and Reports on Form 8-K   63

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,
  
 
   2004
   (Restated)
2003
   2004
   (Restated)
2003
  
 
   (in millions, except per share amounts)

  
Interest Income                          
  Loans held for sale   $ 396   $ 693   $ 724   $ 1,361  
  Loans held in portfolio     2,121     1,905     4,193     3,869  
  Available-for-sale securities     180     468     444     984  
  Other interest and dividend income     55     72     112     152  
   
 
 
 
 
    Total interest income     2,752     3,138     5,473     6,366  
Interest Expense                          
  Deposits     458     548     901     1,135  
  Borrowings     500     604     1,046     1,253  
   
 
 
 
 
    Total interest expense     958     1,152     1,947     2,388  
   
 
 
 
 
      Net interest income     1,794     1,986     3,526     3,978  
  Provision for loan and lease losses     60     81     116     169  
   
 
 
 
 
    Net interest income after provision for loan and lease losses     1,734     1,905     3,410     3,809  
Noninterest Income                          
  Home loan mortgage banking income (expense):                          
    Loan servicing fees     485     593     987     1,206  
    Amortization of mortgage servicing rights     (546 )   (1,032 )   (1,296 )   (2,000 )
    Net mortgage servicing rights valuation adjustments     (51 )   (309 )   (657 )   (272 )
    Revaluation gain (loss) from derivatives     (180 )   598     862     815  
    Net settlement income from certain interest-rate swaps     192     84     359     224  
    Gain from mortgage loans     113     747     284     1,391  
    Other home loan mortgage banking expense, net     (13 )   (70 )   (8 )   (127 )
   
 
 
 
 
      Total home loan mortgage banking income     –     611     531     1,237  
  Depositor and other retail banking fees     507     454     969     875  
  Securities fees and commissions     105     100     212     189  
  Insurance income     57     48     118     94  
  Portfolio loan related income     103     111     190     227  
  Gain from other available-for-sale securities     41     137     62     131  
  Loss on extinguishment of borrowings     (1 )   (49 )   (90 )   (136 )
  Other income     82     114     139     204  
   
 
 
 
 
    Total noninterest income     894     1,526     2,131     2,821  
Noninterest Expense                          
  Compensation and benefits     849     843     1,748     1,590  
  Occupancy and equipment     393     371     794     672  
  Telecommunications and outsourced information services     123     140     246     280  
  Depositor and other retail banking losses     40     37     80     78  
  Amortization of other intangible assets     14     15     29     31  
  Advertising and promotion     84     80     143     139  
  Professional fees     32     66     71     120  
  Other expense     313     298     617     586  
   
 
 
 
 
    Total noninterest expense     1,848     1,850     3,728     3,496  
   
 
 
 
 
      Income from continuing operations before income taxes     780     1,581     1,813     3,134  
      Income taxes     291     586     676     1,161  
   
 
 
 
 
        Income from continuing operations, net of taxes     489     995     1,137     1,973  
   
 
 
 
 
Discontinued Operations                          
      Income (loss) from discontinued operations before income taxes     –     34     (32 )   65  
      Gain on disposition of discontinued operations     –     –     676     –  
      Income taxes     –     12     245     24  
   
 
 
 
 
        Income from discontinued operations, net of taxes     –     22     399     41  
   
 
 
 
 
Net Income   $ 489   $ 1,017   $ 1,536   $ 2,014  
   
 
 
 
 

(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
June 30,
   Six Months Ended
June 30,
 
   2004
   (Restated)
2003
   2004
   (Restated)
2003
 
   (in millions, except per share amounts)
Basic Earnings Per Common Share:                        
  Income from continuing operations   $ 0.57   $ 1.09   $ 1.32   $ 2.15
  Income from discontinued operations, net     –     0.03     0.46     0.05
   
 
 
 
  Net income     0.57     1.12     1.78     2.20

Diluted Earnings Per Common Share:
 
 
 
 
 
 
 
 
 
 
 
 
  Income from continuing operations   $ 0.55   $ 1.07   $ 1.29   $ 2.12
  Income from discontinued operations, net     –     0.02     0.45     0.04
   
 
 
 
  Net income     0.55     1.09     1.74     2.16

Dividends declared per common share
 
 
0.43
 
 
0.30
 
 
0.85
 
 
0.59
Basic weighted average number of common shares outstanding (in thousands)     860,496     910,921     861,898     915,974
Diluted weighted average number of common shares outstanding (in thousands)     883,414     929,386     884,940     932,109

See Notes to Consolidated Financial Statements.

2


WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(UNAUDITED)

 
   June 30,
2004
   December 31,
2003
  
 
   (dollars in millions)

  
Assets              
  Cash and cash equivalents   $ 5,133   $ 7,018  
  Federal funds sold and securities purchased under agreements to resell     70     19  
  Available-for-sale securities, total amortized cost of $19,392 and $36,858:              
    Mortgage-backed securities (including assets pledged of $3,157 and $3,642)     10,042     10,695  
    Investment securities (including assets pledged of $8,097 and $19,353)     9,337     26,012  
   
 
 
      Total available-for-sale securities     19,379     36,707  
  Loans held for sale     26,409     20,343  
  Loans held in portfolio     195,929     175,644  
  Allowance for loan and lease losses     (1,293 )   (1,250 )
   
 
 
      Total loans held in portfolio, net of allowance for loan and lease losses     194,636     174,394  
  Investment in Federal Home Loan Banks     3,965     3,462  
  Mortgage servicing rights     7,501     6,354  
  Goodwill     6,196     6,196  
  Assets of discontinued operations     –     4,184  
  Other assets     15,255     16,501  
   
 
 
      Total assets   $ 278,544   $ 275,178  
   
 
 

Liabilities
 
 
 
 
 
 
 
  Deposits:              
    Noninterest-bearing deposits   $ 33,343   $ 29,968  
    Interest-bearing deposits     129,123     123,213  
   
 
 
      Total deposits     162,466     153,181  
  Federal funds purchased and commercial paper     2,293     2,011  
  Securities sold under agreements to repurchase     15,764     28,333  
  Advances from Federal Home Loan Banks     61,379     48,330  
  Other borrowings     12,113     15,483  
  Liabilities of discontinued operations     –     3,578  
  Other liabilities     4,160     4,520  
   
 
 
      Total liabilities     258,175     255,436  

Stockholders' Equity
 
 
 
 
 
 
 
  Common stock, no par value: 1,600,000,000 shares authorized, 872,246,088 and 880,985,764 shares issued and outstanding     –     –  
  Capital surplus – common stock     3,210     3,682  
  Accumulated other comprehensive loss     (222 )   (524 )
  Retained earnings     17,381     16,584  
   
 
 
      Total stockholders' equity     20,369     19,742  
   
 
 
      Total liabilities and stockholders' equity   $ 278,544   $ 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   –     –     –     2,014     2,014  
  Other comprehensive income (loss), net of tax:                              
    Net unrealized gain from securities arising during the period, net of reclassification adjustments   –     –     240     –     240  
    Net unrealized loss from cash flow hedging instruments   –     –     (25 )   –     (25 )
    Minimum pension liability adjustment   –     –     (4 )   –     (4 )
                         
 
Total comprehensive income                           2,225  
Cash dividends declared on common stock   –     –     –     (543 )   (543 )
Cash dividends returned(1)   –     –     –     4     4  
Common stock repurchased and retired   (25.5 )   (972 )   –     –     (972 )
Common stock returned from escrow   (0.9 )   –     –     –     –  
Common stock issued   6.6     203     –     –     203  
   
 
 
 
 
 
BALANCE, June 30, 2003 (Restated)   924.2   $ 5,192   $ 386   $ 15,400   $ 20,978  
   
 
 
 
 
 

BALANCE, December 31, 2003
 
881.0
 
$
3,682
 
$
(524
)
$
16,584
 
$
19,742
 
Comprehensive income:                              
  Net income   –     –     –     1,536     1,536  
  Other comprehensive income (loss), net of tax:                              
    Net unrealized gain from securities arising during the period, net of reclassification adjustments   –     –     106     –     106  
    Net unrealized gain from cash flow hedging instruments   –     –     202     –     202  
    Minimum pension liability adjustment   –     –     (6 )   –     (6 )
                         
 
Total comprehensive income                           1,838  
Cash dividends declared on common stock   –     –     –     (739 )   (739 )
Common stock repurchased and retired   (16.1 )   (712 )   –     –     (712 )
Common stock issued   7.3     240     –     –     240  
   
 
 
 
 
 
BALANCE, June 30, 2004   872.2   $ 3,210   $ (222 ) $ 17,381   $ 20,369  
   
 
 
 
 
 
(1)
Represents accumulated dividends on shares returned from escrow.

See Notes to Consolidated Financial Statements.