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, 2005
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 29, 2005:
Common Stock – 877,243,302(1)
(1) Includes 6,000,000 shares held in escrow.
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2005
| |
Page |
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|---|---|---|---|---|---|---|---|
| PART I – Financial Information | 1 | ||||||
| Item 1. Financial Statements | 1 | ||||||
| Consolidated Statements of Income – Three Months Ended March 31, 2005 and 2004 |
1 | ||||||
| Consolidated Statements of Financial Condition – March 31, 2005 and December 31, 2004 |
3 | ||||||
| Consolidated Statements of Stockholders' Equity and Comprehensive Income – Three Months Ended March 31, 2005 and 2004 |
4 | ||||||
| Consolidated Statements of Cash Flows – Three Months Ended March 31, 2005 and 2004 |
5 | ||||||
| Notes to Consolidated Financial Statements | 7 | ||||||
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |
17 |
||||||
| Cautionary Statements | 17 | ||||||
| Overview | 18 | ||||||
| Controls and Procedures | 19 | ||||||
| Critical Accounting Policies | 20 | ||||||
| Recently Issued Accounting Standards | 20 | ||||||
| Summary Financial Data | 22 | ||||||
| Earnings Performance from Continuing Operations | 23 | ||||||
| Review of Financial Condition | 31 | ||||||
| Operating Segments | 34 | ||||||
| Risk Management | 38 | ||||||
| Credit Risk Management | 39 | ||||||
| Liquidity Risk Management | 41 | ||||||
| Off-Balance Sheet Activities | 43 | ||||||
| Capital Adequacy | 43 | ||||||
| Market Risk Management | 44 | ||||||
| Maturity and Repricing Information | 48 | ||||||
| Operational Risk Management | 54 | ||||||
| Item 3. Quantitative and Qualitative Disclosures About Market Risk | 44 | ||||||
| Item 4. Controls and Procedures | 19 | ||||||
PART II – Other Information |
55 |
||||||
| Item 1. Legal Proceedings | 55 | ||||||
| Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 55 | ||||||
| Item 4. Submission of Matters to a Vote of Security Holders | 56 | ||||||
| Item 6. Exhibits | 56 | ||||||
i
PART I – FINANCIAL INFORMATION
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
| |
Three Months Ended March 31, |
||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| |
2005 |
2004 |
|||||||||
| |
(in millions, except per share amounts) |
||||||||||
| Interest Income | |||||||||||
| Loans held for sale | $ | 470 | $ | 332 | |||||||
| Loans held in portfolio | 2,544 | 2,067 | |||||||||
| Available-for-sale securities | 224 | 265 | |||||||||
| Trading securities | 79 | 24 | |||||||||
| Other interest and dividend income | 43 | 33 | |||||||||
| Total interest income | 3,360 | 2,721 | |||||||||
| Interest Expense | |||||||||||
| Deposits | 696 | 443 | |||||||||
| Borrowings | 774 | 546 | |||||||||
| Total interest expense | 1,470 | 989 | |||||||||
| Net interest income | 1,890 | 1,732 | |||||||||
| Provision for loan and lease losses | 16 | 56 | |||||||||
| Net interest income after provision for loan and lease losses | 1,874 | 1,676 | |||||||||
| Noninterest Income | |||||||||||
| Home loan mortgage banking income (expense): | |||||||||||
| Loan servicing fees | 489 | 502 | |||||||||
| Amortization of mortgage servicing rights | (570 | ) | (750 | ) | |||||||
| Net mortgage servicing rights valuation adjustments | 539 | (606 | ) | ||||||||
| Revaluation gain from derivatives | 63 | 1,042 | |||||||||
| Net settlement income from certain interest-rate swaps | 51 | 167 | |||||||||
| Gain from mortgage loans | 178 | 171 | |||||||||
| Other home loan mortgage banking income, net | 26 | 5 | |||||||||
| Total home loan mortgage banking income | 776 | 531 | |||||||||
| Depositor and other retail banking fees | 490 | 463 | |||||||||
| Securities fees and commissions | 110 | 107 | |||||||||
| Insurance income | 46 | 61 | |||||||||
| Portfolio loan related income | 85 | 87 | |||||||||
| Trading securities income (loss) | (89 | ) | 8 | ||||||||
| Gain (loss) from other available-for-sale securities | (122 | ) | 21 | ||||||||
| Loss on extinguishment of borrowings | – | (89 | ) | ||||||||
| Other income | 112 | 48 | |||||||||
| Total noninterest income | 1,408 | 1,237 | |||||||||
| Noninterest Expense | |||||||||||
| Compensation and benefits | 876 | 899 | |||||||||
| Occupancy and equipment | 402 | 400 | |||||||||
| Telecommunications and outsourced information services | 104 | 123 | |||||||||
| Depositor and other retail banking losses | 55 | 40 | |||||||||
| Advertising and promotion | 55 | 58 | |||||||||
| Professional fees | 34 | 39 | |||||||||
| Other expense | 313 | 321 | |||||||||
| Total noninterest expense | 1,839 | 1,880 | |||||||||
| Income from continuing operations before income taxes | 1,443 | 1,033 | |||||||||
| Income taxes | 541 | 385 | |||||||||
| Income from continuing operations, net of taxes | 902 | 648 | |||||||||
(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, |
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|---|---|---|---|---|---|---|---|---|---|
| |
2005 |
2004 |
|||||||
| |
(in millions, except per share amounts) |
||||||||
| Discontinued Operations | |||||||||
| Loss from discontinued operations before income taxes | – | $ | (32 | ) | |||||
| Gain on disposition of discontinued operations | – | 676 | |||||||
| Income taxes | – | 245 | |||||||
| Income from discontinued operations, net of taxes | – | 399 | |||||||
| Net Income | $ | 902 | $ | 1,047 | |||||
| Basic earnings per common share: | |||||||||
| Income from continuing operations | $ | 1.04 | $ | 0.75 | |||||
| Income from discontinued operations, net | – | 0.46 | |||||||
| Net Income | 1.04 | 1.21 | |||||||
| Diluted earnings per common share: | |||||||||
| Income from continuing operations | $ | 1.01 | $ | 0.73 | |||||
| Income from discontinued operations, net | – | 0.45 | |||||||
| Net Income | 1.01 | 1.18 | |||||||
Dividends declared per common share |
0.46 |
0.42 |
|||||||
| Basic weighted average number of common shares outstanding (in thousands) | 864,933 | 863,299 | |||||||
| Diluted weighted average number of common shares outstanding (in thousands) | 888,789 | 886,467 | |||||||
See Notes to Consolidated Financial Statements.
2
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(UNAUDITED)
| |
March 31, 2005 |
December 31, 2004 |
||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
(dollars in millions) |
|||||||||
| Assets | ||||||||||
| Cash and cash equivalents | $ | 4,811 | $ | 4,455 | ||||||
| Federal funds sold and securities purchased under agreements to resell | 1,152 | 82 | ||||||||
| Trading securities | 6,066 | 5,588 | ||||||||
| Available-for-sale securities, total amortized cost of $20,569 and $19,047: | ||||||||||
| Mortgage-backed securities (including assets pledged of $6,664 and $5,716) | 15,947 | 14,923 | ||||||||
| Investment securities (including assets pledged of $2,480 and $3,344) | 4,756 | 4,296 | ||||||||
| Total available-for-sale securities | 20,703 | 19,219 | ||||||||
| Loans held for sale | 41,197 | 42,743 | ||||||||
| Loans held in portfolio | 214,114 | 207,071 | ||||||||
| Allowance for loan and lease losses | (1,280 | ) | (1,301 | ) | ||||||
| Total loans held in portfolio, net of allowance for loan and lease losses | 212,834 | 205,770 | ||||||||
| Investment in Federal Home Loan Banks | 3,973 | 4,059 | ||||||||
| Mortgage servicing rights | 6,802 | 5,906 | ||||||||
| Goodwill | 6,196 | 6,196 | ||||||||
| Other assets | 15,962 | 13,900 | ||||||||
| Total assets | $ | 319,696 | $ | 307,918 | ||||||
Liabilities |
||||||||||
| Deposits: | ||||||||||
| Noninterest-bearing deposits | $ | 34,941 | $ | 32,780 | ||||||
| Interest-bearing deposits | 148,690 | 140,878 | ||||||||
| Total deposits | 183,631 | 173,658 | ||||||||
| Federal funds purchased and commercial paper | 2,053 | 4,045 | ||||||||
| Securities sold under agreements to repurchase | 16,716 | 15,944 | ||||||||
| Advances from Federal Home Loan Banks | 66,730 | 70,074 | ||||||||
| Other borrowings | 21,938 | 18,498 | ||||||||
| Other liabilities | 6,861 | 4,473 | ||||||||
| Total liabilities | 297,929 | 286,692 | ||||||||
Stockholders' Equity |
||||||||||
| Common stock, no par value: 1,600,000,000 shares authorized, 877,286,984 and 874,261,898 shares issued and outstanding | – | – | ||||||||
| Capital surplus – common stock | 3,399 | 3,350 | ||||||||
| Accumulated other comprehensive loss | (84 | ) | (76 | ) | ||||||
| Retained earnings | 18,452 | 17,952 | ||||||||
| Total stockholders' equity | 21,767 | 21,226 | ||||||||
| Total liabilities and stockholders' equity | $ | 319,696 | $ | 307,918 | ||||||
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, 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 |
|||||||
BALANCE, December 31, 2004 |
874.3 |
$ |
3,350 |
$ |
(76 |
) |
$ |
17,952 |
$ |
21,226 |
|||||||
| Comprehensive income: | |||||||||||||||||
| Net income | – | – | – | 902 | 902 | ||||||||||||
| Other comprehensive income (loss), net of tax: | |||||||||||||||||
| Net unrealized loss from securities arising during the period, net of reclassification adjustments | – | – | (25 | ) | – | (25 | ) | ||||||||||
| Net unrealized gain from cash flow hedging instruments | – | – | 17 | – | 17 | ||||||||||||
| Total comprehensive income | 894 | ||||||||||||||||
| Cash dividends declared on common stock | – | – | – | (402 | ) | (402 | ) | ||||||||||
| Common stock repurchased and retired | (2.6 | ) | (100 | ) | – | – | (100 | ) | |||||||||
| Common stock issued | 5.6 | 149 | – | – | 149 | ||||||||||||
| BALANCE, March 31, 2005 | 877.3 | $ | 3,399 | $ | (84 | ) | $ | 18,452 | $ | 21,767 | |||||||
See Notes to Consolidated Financial Statements.
4
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| |
Three Months Ended March 31, |
|||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| |
2005 |
2004 |
||||||||
| |
(in millions) |
|||||||||
| Cash Flows from Operating Activities | ||||||||||
| Net income | $ | 902 | $ | 1,047 | ||||||
| Income from discontinued operations, net of taxes | – | (399 | ) | |||||||
| Income from continuing operations | 902 | 648 | ||||||||
| Adjustments to reconcile income from continuing operations to net cash used by operating activities: | ||||||||||
| Provision for loan and lease losses | 16 | 56 | ||||||||
| Gain from mortgage loans | (178 | ) | (171 | ) | ||||||
| Loss (gain) from available-for-sale securities | 119 | (21 | ) | |||||||
| Revaluation gain from derivatives | (63 | ) | (1,042 | ) | ||||||
| Loss on extinguishment of borrowings | – | 89 | ||||||||
| Depreciation and amortization | 688 | 916 | ||||||||
| Provision for mortgage servicing rights (reversal) impairment | (427 | ) | 606 | |||||||
| Stock dividends from Federal Home Loan Banks | (5 | ) | (27 | ) | ||||||
| Origination and purchases of loans held for sale, net of principal payments | (39,278 | ) | (32,813 | ) | ||||||
| Proceeds from sales of loans held for sale | 35,033 | 18,962 | ||||||||
| Net (increase) decrease in trading securities | (344 | ) | 413 | |||||||
| (Increase) decrease in other assets | (474 | ) | 2,562 | |||||||
| Increase (decrease) in other liabilities | 1,001 | (603 | ) | |||||||
| Net cash used by operating activities | (3,010 | ) | (10,425 | ) | ||||||
Cash Flows from Investing Activities |
||||||||||
| Purchases of securities | (5,964 | ) | (11 | ) | ||||||
| Proceeds from sales and maturities of mortgage-backed securities | 2,447 | 255 | ||||||||
| Proceeds from sales and maturities of other available-for-sale securities | 874 | 14,027 | ||||||||
| Principal payments on securities | 749 | 860 | ||||||||
| Purchases of Federal Home Loan Bank stock | – | (441 | ) | |||||||
| Redemption of Federal Home Loan Bank stock | 91 | 14 | ||||||||
| Origination and purchases of loans held in portfolio | (21,653 | ) | (28,847 | ) | ||||||
| Principal payments on loans held in portfolio | 18,988 | 16,624 | ||||||||
| Proceeds from sales of loans held in portfolio | 138 | 197 | ||||||||
| Proceeds from sales of foreclosed assets | ||||||||||