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

FORM 10-Q

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 October 29, 2004:

Common Stock – 873,079,411(1)

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

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2004


TABLE OF CONTENTS

 
   Page
PART I – Financial Information   1
  Item 1. Financial Statements   1
    Consolidated Statements of Income –
Three and Nine Months Ended September 30, 2004 and 2003		   1
    Consolidated Statements of Financial Condition –
September 30, 2004 and December 31, 2003		   3
    Consolidated Statements of Stockholders' Equity and Comprehensive Income –
Nine Months Ended September 30, 2004 and 2003		   4
    Consolidated Statements of Cash Flows –
Nine Months Ended September 30, 2004 and 2003		   5
    Notes to Consolidated Financial Statements   7
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
 
21
    Cautionary Statements   21
    Overview   22
    Controls and Procedures   24
    Critical Accounting Policies   25
    Recently Issued Accounting Standards   25
    Summary Financial Data   26
    Earnings Performance from Continuing Operations   27
    Review of Financial Condition   39
    Operating Segments   42
    Off-Balance Sheet Activities   47
    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   24

PART II – Other Information
 
63
  Item 1. Legal Proceedings   63
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds   63
  Item 4. Submission of Matters to a Vote of Security Holders   63
  Item 6. Exhibits   63

i


PART I – FINANCIAL INFORMATION

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

 
   Three Months Ended
September 30,
   Nine Months Ended
September 30,
  
 
   2004
   2003
   2004
   2003
  
 
   (in millions, except per share amounts)

  
Interest Income                          
  Loans held for sale   $ 341   $ 689   $ 1,079   $ 2,061  
  Loans held in portfolio     2,226     1,843     6,404     5,701  
  Available-for-sale securities     163     401     607     1,384  
  Other interest and dividend income     81     65     194     218  
   
 
 
 
 
    Total interest income     2,811     2,998     8,284     9,364  
Interest Expense                          
  Deposits     539     538     1,440     1,674  
  Borrowings     532     551     1,578     1,803  
   
 
 
 
 
    Total interest expense     1,071     1,089     3,018     3,477  
   
 
 
 
 
      Net interest income     1,740     1,909     5,266     5,887  
  Provision for loan and lease losses     56     76     172     244  
   
 
 
 
 
    Net interest income after provision for loan and lease losses     1,684     1,833     5,094     5,643  
Noninterest Income                          
  Home loan mortgage banking income (expense):                          
    Loan servicing fees     482     542     1,469     1,748  
    Amortization of mortgage servicing rights     (589 )   (665 )   (1,884 )   (2,665 )
    Net mortgage servicing rights valuation adjustments     165     368     (493 )   96  
    Revaluation gain (loss) from derivatives     107     (172 )   969     643  
    Net settlement income from certain interest-rate swaps     126     130     485     354  
    Gain (loss) from mortgage loans     210     (204 )   494     1,186  
    Other home loan mortgage banking income (expense), net     3     146     (5 )   19  
   
 
 
 
 
      Total home loan mortgage banking income     504     145     1,035     1,381  
  Depositor and other retail banking fees     514     471     1,484     1,346  
  Securities fees and commissions     104     103     315     291  
  Insurance income     61     45     179     139  
  Portfolio loan related income     109     116     299     344  
  Gain from other available-for-sale securities     11     557     73     689  
  Gain (loss) on extinguishment of borrowings     (147 )   7     (237 )   (129 )
  Other income     108     120     247     323  
   
 
 
 
 
    Total noninterest income     1,264     1,564     3,395     4,384  
Noninterest Expense                          
  Compensation and benefits     841     837     2,589     2,427  
  Occupancy and equipment     404     352     1,197     1,024  
  Telecommunications and outsourced information services     118     150     364     429  
  Depositor and other retail banking losses     54     35     134     113  
  Amortization of other intangible assets     14     15     42     46  
  Advertising and promotion     76     51     219     190  
  Professional fees     34     69     105     189  
  Other expense     328     301     947     888  
   
 
 
 
 
    Total noninterest expense     1,869     1,810     5,597     5,306  
   
 
 
 
 
      Income from continuing operations before income taxes     1,079     1,587     2,892     4,721  
      Income taxes     405     588     1,081     1,749  
   
 
 
 
 
        Income from continuing operations, net of taxes     674     999     1,811     2,972  
   
 
 
 
 
Discontinued Operations                          
    Income (loss) from discontinued operations before income taxes     –     38     (32 )   102  
    Gain on disposition of discontinued operations     –     –     676     –  
    Income taxes     –     14     245     37  
   
 
 
 
 
        Income from discontinued operations, net of taxes     –     24     399     65  
   
 
 
 
 
Net Income   $ 674   $ 1,023   $ 2,210   $ 3,037  
   
 
 
 
 

(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
September 30,
   Nine Months Ended
September 30,
 
   2004
   2003
   2004
   2003
 
   (in millions, except per share amounts)
Basic Earnings Per Common Share:                        
  Income from continuing operations   $ 0.78   $ 1.11   $ 2.10   $ 3.27
  Income from discontinued operations, net     –     0.03     0.46     0.07
   
 
 
 
    Net Income     0.78     1.14     2.56     3.34
Diluted Earnings Per Common Share:                        
  Income from continuing operations   $ 0.76   $ 1.09   $ 2.05   $ 3.20
  Income from discontinued operations, net     –     0.02     0.45     0.07
   
 
 
 
    Net Income     0.76     1.11     2.50     3.27

Dividends declared per common share
 
 
0.44
 
 
0.40
 
 
1.29
 
 
0.99
Basic weighted average number of common shares outstanding (in thousands)     862,004     899,579     861,933     910,449
Diluted weighted average number of common shares outstanding (in thousands)     882,323     918,372     884,068     927,470

See Notes to Consolidated Financial Statements.

2


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

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

  
Assets              
  Cash and cash equivalents   $ 4,689   $ 7,018  
  Federal funds sold and securities purchased under agreements to resell     30     19  
  Available-for-sale securities, total amortized cost of $16,312 and $36,858:              
    Mortgage-backed securities (including assets pledged of $3,483 and $3,642)     10,168     10,695  
    Investment securities (including assets pledged of $5,256 and $19,353)     6,319     26,012  
   
 
 
      Total available-for-sale securities     16,487     36,707  
  Loans held for sale     29,184     20,837  
  Loans held in portfolio     206,158     175,150  
  Allowance for loan and lease losses     (1,322 )   (1,250 )
   
 
 
      Total loans held in portfolio, net of allowance for loan and lease losses     204,836     173,900  
  Investment in Federal Home Loan Banks     3,883     3,462  
  Mortgage servicing rights     6,112     6,354  
  Goodwill     6,196     6,196  
  Assets of discontinued operations     –     4,184  
  Other assets     17,411     16,501  
   
 
 
      Total assets   $ 288,828   $ 275,178  
   
 
 

Liabilities
 
 
 
 
 
 
 
  Deposits:              
    Noninterest-bearing deposits   $ 32,250   $ 29,968  
    Interest-bearing deposits     136,445     123,213  
   
 
 
      Total deposits     168,695     153,181  
  Federal funds purchased and commercial paper     7,025     2,011  
  Securities sold under agreements to repurchase     15,611     28,333  
  Advances from Federal Home Loan Banks     59,758     48,330  
  Other borrowings     12,747     15,483  
  Liabilities of discontinued operations     –     3,578  
  Other liabilities     4,172     4,520  
   
 
 
      Total liabilities     268,008     255,436  

Stockholders' Equity
 
 
 
 
 
 
 
  Common stock, no par value: 1,600,000,000 shares authorized, 873,085,462 and 880,985,764 shares issued and outstanding     –     –  
  Capital surplus – common stock     3,270     3,682  
  Accumulated other comprehensive loss     (124 )   (524 )
  Retained earnings     17,674     16,584  
   
 
 
      Total stockholders' equity     20,820     19,742  
   
 
 
      Total liabilities and stockholders' equity   $ 288,828   $ 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   944.0   $ 5,961   $ 175   $ 13,925   $ 20,061  
Comprehensive income:                              
  Net income   –     –     –     3,037     3,037  
  Other comprehensive income (loss), net of tax:                              
    Net unrealized loss from securities arising during the period, net of reclassification adjustments   –     –     (707 )   –     (707 )
    Net unrealized gain from cash flow hedging instruments   –     –     117     –     117  
    Minimum pension liability adjustment   –     –     (4 )   –     (4 )
                         
 
Total comprehensive income                           2,443  
Cash dividends declared on common stock   –     –     –     (906 )   (906 )
Cash dividends returned(1)   –     –     –     8     8  
Common stock repurchased and retired   (39.0 )   (1,430 )   –     –     (1,430 )
Common stock returned from escrow   –     –     –     –     –  
Common stock issued   8.9     265     –     –     265  
   
 
 
 
 
 

BALANCE, September 30, 2003
 
913.9
 
$
4,796
 
$
(419
)
$
16,064
 
$
20,441
 
   
 
 
 
 
 

BALANCE, December 31, 2003
 
881.0
 
$
3,682
 
$
(524
)
$
16,584
 
$
19,742
 
Comprehensive income:                              
  Net income   –     –     –     2,210     2,210  
  Other comprehensive income, net of tax:                              
    Net unrealized gain from securities arising during the period, net of reclassification adjustments   –     –     201     –     201  
    Net unrealized gain from cash flow hedging instruments   –     –     205     –     205  
    Minimum pension liability adjustment   –     –     (6 )   –     (6 )
                         
 
Total comprehensive income                           2,610  
Cash dividends declared on common stock   –     –     –     (1,120 )   (1,120 )
Common stock repurchased and retired   (16.1 )   (712 )   –