Mr. Cooper (COOP) 10-Q 2003 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934FOR 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. Yesx    No¨

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

The number of shares outstanding of the issuer’s classes of common stock as of July 31, 2003:

Common Stock – 923,252,415⁽¹⁾

⁽¹⁾ Includes 16,650,000 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 JUNE 30, 2003

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, 2003 and 2002	1
Consolidated Statements of Financial Condition— June 30, 2003 and December 31, 2002	2
Consolidated Statements of Stockholders’ Equity and Comprehensive Income— Six Months Ended June 30, 2003 and 2002	3
Consolidated Statements of Cash Flows— Six Months Ended June 30, 2003 and 2002	4
Notes to Consolidated Financial Statements	6
Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Cautionary Statements	17
Controls and Procedures	17
Critical Accounting Policies	17
Recently Issued Accounting Standards	18
Summary Financial Data	19
Earnings Performance	20
Review of Financial Condition	32
Operating Segments	35
Off-Balance Sheet Activities	39
Asset Quality	39
Liquidity	43
Capital Adequacy	44
Market Risk Management	45
Maturity and Repricing Information	48
Item 3.    Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.    Controls and Procedures	17
PART II    Other Information	55
Item 4.    Submission of Matters to a Vote of Security Holders	55
Item 6.    Exhibits and Reports on Form 8-K	55

PART I—FINANCIAL INFORMATION

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
	(in millions, except per share amounts)
Interest Income
Loans held for sale	$	626		$	361		$	1,216		$	804
Loans held in portfolio		2,050			2,335			4,155			4,746
Available-for-sale securities		469			812			986			1,759
Other interest and dividend income		72			77			152			159
Total interest income		3,217			3,585			6,509			7,468
Interest Expense
Deposits		548			666			1,135			1,317
Borrowings		644			819			1,332			1,655
Total interest expense		1,192			1,485			2,467			2,972
Net interest income		2,025			2,100			4,042			4,496
Provision for loan and lease losses		118			160			243			335
Net interest income after provision for loan and lease losses		1,907			1,940			3,799			4,161
Noninterest Income
Home loan mortgage banking income (expense):
Loan servicing fees		593			560			1,206			1,100
Amortization of mortgage servicing rights		(1,032	)		(504	)		(2,000	)		(983	)
Mortgage servicing rights impairment		(309	)		(1,107	)		(272	)		(1,062	)
Revaluation gain from derivatives		598			857			815			842
Net settlement income from certain interest-rate swaps		84			101			224			107
Gain from mortgage loans		622			220			1,210			471
Other home loan mortgage banking income, net		149			117			246			156
Total home loan mortgage banking income		705			244			1,429			631
Depositor and other retail banking fees		454			398			875			759
Securities fees and commissions		100			98			189			180
Insurance income		53			39			105			86
Portfolio loan related income		111			75			227			140
Gain (loss) from other available-for-sale securities		137			137			131			(161	)
(Loss) gain on extinguishment of securities sold under agreements to repurchase		(49	)		121			(136	)		195
Other income		118			96			215			186
Total noninterest income		1,629			1,208			3,035			2,016
Noninterest Expense
Compensation and benefits		867			732			1,638			1,422
Occupancy and equipment		375			283			679			571
Telecommunications and outsourced information services		143			134			287			273
Depositor and other retail banking losses		50			48			102			98
Amortization of other intangible assets		15			17			31			34
Advertising and promotion		83			69			146			113
Professional fees		68			52			124			107
Other expense		317			251			619			490
Total noninterest expense		1,918			1,586			3,626			3,108
Income before income taxes		1,618			1,562			3,208			3,069
Income taxes		598			572			1,185			1,123
Net Income	$	1,020		$	990		$	2,023		$	1,946
Net Income Attributable to Common Stock	$	1,020		$	988		$	2,023		$	1,942
Net income per common share:
Basic	$	1.12		$	1.04		$	2.21		$	2.04
Diluted		1.10			1.01			2.17			2.00
Dividends declared per common share		0.30			0.26			0.59			0.51
Basic weighted average number of common shares outstanding (in thousands)		910,921			954,662			915,974			951,177
Diluted weighted average number of common shares outstanding (in thousands)		929,386			974,153			932,109			968,717

See Notes to Consolidated Financial Statements.

1

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(Unaudited)

	June 30, 2003			December 31, 2002
	(dollars in millions)
Assets
Cash and cash equivalents	$	7,388		$	7,208
Federal funds sold and securities purchased under resale agreements		2,085			2,015
Available-for-sale securities, total amortized cost of $43,306 and $42,592:
Mortgage-backed securities (including assets pledged of $7,433 and $6,570)		24,875			28,375
Investment securities (including assets pledged of $15,686 and $10,679)		20,292			15,597
		45,167			43,972
Loans held for sale		40,631			33,996
Loans held in portfolio		153,866			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		152,186			145,875
Investment in Federal Home Loan Banks		3,596			3,703
Mortgage servicing rights		4,598			5,341
Goodwill		6,253			6,270
Other assets		21,299			19,918
Total assets	$	283,203		$	268,298
Liabilities
Deposits:
Noninterest-bearing deposits	$	46,505		$	37,515
Interest-bearing deposits		119,952			118,001
Total deposits		166,457			155,516
Federal funds purchased and commercial paper		3,579			1,247
Securities sold under agreements to repurchase		22,964			16,717
Advances from Federal Home Loan Banks		46,127			51,265
Other borrowings		14,700			15,264
Other liabilities		8,315			8,155
Total liabilities		262,142			248,164
Stockholders’ Equity
Common stock, no par value: 1,600,000,000 shares authorized, 924,237,997 and 944,046,787 shares issued and outstanding		–			–
Capital surplus—common stock		5,193			5,961
Accumulated other comprehensive income		386			175
Retained earnings		15,482			13,998
Total stockholders’ equity		21,061			20,134
Total liabilities and stockholders’ equity	$	283,203		$	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	–			–			–			1,946			1,946
Other comprehensive income (loss), net of tax:
Net unrealized gain from securities arising during the period, net of reclassification adjustments	–			–			507			–			507
Net unrealized loss on cash flow hedging instruments	–			–			(274	)		–			(274	)
Minimum pension liability adjustment	–			–			(2	)		–			(2	)
Total comprehensive income													2,177
Cash dividends declared on common stock	–			–			–			(496	)		(496	)
Cash dividends declared on redeemable preferred stock	–			–			–			(4	)		(4	)
Common stock repurchased and retired	(1.0	)		(37	)		–			–			(37	)
Common stock issued for acquisitions	96.4			3,672			–			–			3,672
Fair value of Dime stock options	–			90			–			–			90
Common stock issued	5.7			132			–			–			132
BALANCE, June 30, 2002	974.2		$	7,035		$	(12	)	$	12,574		$	19,597
BALANCE, December 31, 2002	944.0		$	5,961		$	175		$	13,998		$	20,134
Comprehensive income:
Net income	–			–			–			2,023			2,023
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 on cash flow hedging instruments	–			–			(25	)		–			(25	)
Minimum pension liability adjustment	–			–			(4	)		–			(4	)
Total comprehensive income													2,234
Cash dividends declared on common stock	–			–			–			(539	)		(539	)
Common stock repurchased and retired	(26.4	)		(972	)		–			–			(972	)
Common stock issued	6.6			204			–			–			204
BALANCE, June 30, 2003	924.2		$	5,193		$	386		$	15,482		$	21,061

See Notes to Consolidated Financial Statements.

3

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30,
	2003			2002
	(in millions)
Cash Flows from Operating Activities
Net income	$	2,023		$	1,946
Adjustments to reconcile net income to net cash (used) provided by operating activities:
Provision for loan and lease losses		243			335
Gain from mortgage loans		(1,210	)		(471	)
(Gain) loss from securities		(132	)		141
Revaluation gain from derivatives		(815	)		(842	)
Loss (gain) on extinguishment of securities sold under agreements to repurchase		136			(195	)
Depreciation and amortization		2,235			1,265
Mortgage servicing rights impairment		272			1,062
Stock dividends from Federal Home Loan Banks		(76	)		(107	)
Origination and purchases of loans held for sale, net of principal payments		(177,297	)		(86,364	)
Proceeds from sales of loans held for sale		168,930			96,990
Decrease (increase) in other assets		173			(433	)
Decrease in other liabilities		(275	)		(190	)
Net cash (used) provided by operating activities		(5,793	)		13,137
Cash Flows from Investing Activities
Purchases of securities		(5,537	)		(41,410	)
Proceeds from sales and maturities of mortgage-backed securities		866			5,439
Proceeds from sales and maturities of other available-for-sale securities		957			34,265
Principal payments on securities		4,805			4,880
Purchases of Federal Home Loan Bank stock		(279	)		(4	)
Redemption of Federal Home Loan Bank stock		463			503
Proceeds from sales of mortgage servicing rights		388			711
Origination and purchases of loans held in portfolio		(49,660	)		(37,333	)
Principal payments on loans held in portfolio		42,044			34,472
Proceeds from sales of foreclosed assets		250			166
Net (increase) decrease in federal funds sold and securities purchased under resale agreements		(70	)		2,167
Net cash used for acquisitions		–			(2,215	)
Purchases of premises and equipment, net		(483	)		(307	)
Net cash (used) provided by investing activities	$	(6,256	)	$	1,334

(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.)

	Six Months Ended June 30,
	2003			2002
	(in millions)
Cash Flows from Financing Activities
Increase in deposits	$	10,941		$	6,716
Increase (decrease) in short-term borrowings		5,417			(9,537	)
Proceeds from long-term borrowings		6,603			20,113
Repayments of long-term borrowings		(4,263	)		(19,514	)
Proceeds from advances from Federal Home Loan Banks		42,421			22,681
Repayments of advances from Federal Home Loan Banks		(47,548	)		(33,363	)
Cash dividends paid on preferred and common stock		(539	)		(500	)
Repurchase of common stock		(972	)		(37	)
Other		169			116
Net cash provided (used) by financing activities		12,229			(13,325	)
Increase in cash and cash equivalents		180			1,146
Cash and cash equivalents, beginning of period		7,208			3,563
Cash and cash equivalents, end of period	$	7,388		$	4,709
Noncash Activities
Loans exchanged for mortgage-backed securities	$	1,639		$	2,518
Real estate acquired through foreclosure		239			212
Cash Paid During the Period for
Interest on deposits	$	1,106		$	1,275
Interest on borrowings		1,321			1,618
Income taxes		2,607			1,742

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 Financial Statements are unaudited and include the accounts of Washington Mutual, Inc. (together with its subsidiaries “Washington Mutual” or the “Company”). Washington Mutual’s accounting and financial reporting policies are in accordance with accounting principles generally accepted in the United States of America. The information furnished in these interim statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for such periods. Such adjustments are of a normal recurring nature unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year. The interim financial information should be read in conjunction with Washington Mutual, Inc.’s 2002 Annual Report on Form 10-K. Certain prior period amounts have been reclassified to conform to current period classifications.

Recently Adopted Accounting Standards

In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (“FIN 46”),Consolidation of Variable Interest Entities. This Interpretation provides guidance on how to identify a variable interest entity and determine when the assets, liabilities, noncontrolling interests and results of operations of a variable interest entity should be consolidated by the primary beneficiary. The primary beneficiary is the enterprise that will absorb a majority of the variable interest entity’s expected losses or receive a majority of the expected residual returns as a result of holding variable interests. The recognition and measurement provisions of this Interpretation apply at inception to any variable interest entity formed after January 31, 2003, and become effective for existing variable interest entities on the first interim or annual reporting period beginning after June 15, 2003. The Company adopted the provisions of FIN 46 for variable interest entities formed on or after February 1, 2003, which did not have a material effect on the Company’s Consolidated Financial Statements. The Company adopted the provisions of FIN 46 for existing variable interest entities on July 1, 2003. As of June 30, 2003, the Company had variable interests in securitization trusts, which are discussed in the 2002 Annual Report on Form 10-K in Note 5 to the Consolidated Financial Statements— “Mortgage Banking Activities.” These trusts are qualifying special-purpose entities, which are exempt from the consolidation requirements of FIN 46. The Company reports its rights and obligations related to these qualifying special-purpose entities according to the requirements of Statement of Financial Accounting Standards (“Statement” or “SFAS”) No. 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. The Company has not identified any unconsolidated investments in variable interest entities that are not qualifying special-purpose entities as of June 30, 2003.

In December 2002, the FASB issued Statement No. 148,Accounting for Stock-Based Compensation—Transition and Disclosure, which amends Statement No. 123,Accounting for Stock-Based Compensation. This Statement provides alternative methods of transitioning, on a voluntary basis, from the intrinsic value method of accounting prescribed by Accounting Principles Board (“APB”) Opinion No. 25,Accounting for Stock Issued to Employees, to the fair value method of accounting for stock-based employee compensation. Effective January 1, 2003 and in accordance with the transitional guidance of Statement No. 148, the Company elected to prospectively apply the fair value method of accounting for stock-based awards granted subsequent to December 31, 2002. Stock-based awards granted prior to January 1, 2003, and not modified after December 31, 2002, will continue to be accounted for under APB Opinion No. 25.

6

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Had compensation cost for the Company’s stock-based compensation plans been determined using the fair value method consistent with Statement No. 123 for all periods presented, the Company’s net income attributable to common stock and net income per common share would have been reduced to the pro forma amounts indicated below:

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
	(dollars in millions, except per share amounts)
Net income attributable to common stock	$	1,020		$	988		$	2,023		$	1,942
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects		22			8			33			14
Deduct: Total stock-based employee compensation expense determined under fair value method for all awards, net of related tax effects		(39	)		(22	)		(69	)		(40	)
Pro forma net income attributable to common stock	$	1,003		$	974		$	1,987		$	1,916
Net income per common share:
Basic:
As reported	$	1.12		$	1.04		$	2.21		$	2.04
Pro forma		1.10			1.02			2.17			2.01
Diluted:
As reported		1.10			1.01			2.17			2.00
Pro forma		1.08			1.00			2.13			1.98

In November 2002, the FASB issued Interpretation No. 45 (“FIN 45”),Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, which expands on the accounting guidance of Statements No. 5, 57, and 107 and incorporates without change the provisions of FASB Interpretation No. 34, which is being superseded. This Interpretation requires a guarantor to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The recognition requirements of FIN 45 apply prospectively to guarantees issued or modified after December 31, 2002. Refer to Note 4 to the Consolidated Financial Statements—“Guarantees” for discussion on significant guarantees that have been entered into by the Company.

Recently Issued Accounting Standards

In April 2003, the FASB issued Statement No. 149,Amendment of Statement 133 on Derivative Instruments and Hedging Activities. Statement No. 149 provides clarification on the definition of derivative instruments within the scope of FASB Statement No. 133. Generally, this Statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003, and is not expected to have a material impact on the Consolidated Financial Statements.

In May 2003, the FASB issued Statement No. 150,Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. Statement No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This Statement, which was effective for financial instruments entered into or modified after May 31, 2003 and for all financial instruments on July 1, 2003, did not have a material impact on the Consolidated Financial Statements.

7

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Note 2:    Earnings Per Share

Information used to calculate earnings per share (“EPS”) was as follows:

	Three Months Ended June 30,					Six Months Ended June 30,
	2003		2002			2003		2002
	(dollars in millions, except per share amounts)
Net income
Net income	$	1,020	$	990		$	2,023	$	1,946
Accumulated dividends on preferred stock		–		(2	)		–		(4	)
Net income attributable to common stock	$	1,020	$	988		$	2,023	$	1,942
Weighted average shares (in thousands)
Basic weighted average number of common shares outstanding		910,921		954,662			915,974		951,177
Dilutive effect of potential common shares from:
Stock options		9,435		9,911			8,403		9,256
Premium Income Equity SecuritiesSM		–		1,671			–		1,516
Trust Preferred Income Equity Redeemable SecuritiesSM		9,030		7,909			7,732		6,768
Diluted weighted average number of common shares outstanding		929,386		974,153			932,109		968,717
Net income per common share
Basic	$	1.12	$	1.04		$	2.21	$	2.04
Diluted		1.10		1.01			2.17		2.00

For the three and six months ended June 30, 2003, options to purchase an additional 41,700 and 1,907,973 shares of common stock were outstanding, but were not included in the computation of diluted EPS because their inclusion would have had an antidilutive effect. For the three and six months ended June 30, 2002, options to purchase an additional 269,689 and 318,187 shares of common stock were outstanding, but were not included in the computation of diluted EPS because their inclusion would have had an antidilutive effect.

Additionally, as part of the 1996 business combination with Keystone Holdings, Inc. (the parent of American Savings Bank, F.A.), 18 million shares of common stock, with an assigned value of $18.4944 per share, were, as of January 1, 2003, held in escrow for the benefit of the investors in Keystone Holdings, the Federal Deposit Insurance Corporation (“FDIC”) as manager of the Federal Savings and Loan Insurance Corporation Resolution Fund and their transferees. The conditions under which these shares can be released from escrow to the Keystone Holdings’ investors and the FDIC are related to the outcome of certain litigation and not based on future earnings or market prices. The escrow would have by its terms automatically expired on December 20, 2002, absent the occurrence of certain circumstances that would extend it. The Company contends that these circumstances have not occurred, while the Keystone Holdings’ investors and the FDIC contend that they have occurred.

Pursuant to an amended tolling agreement, the parties agreed to return to the Company 225,000 shares per month through June 30, 2003. During the six months ended June 30, 2003, 900,000 of these shares were returned to the Company and the return of an additional 450,000 shares was in process. These 450,000 shares have since been returned to the Company subsequent to June 30, 2003. At June 30, 2003, the Company continues to assert the conditions for releasing the remaining shares to the Keystone Holdings’ investors and the FDIC had not occurred, and thus the remaining shares were still in the escrow. Therefore, none of the shares in the escrow during the periods indicated above were included in the above computations.

8

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

While the Company and Keystone Holdings have been willing to extend the tolling agreement beyond June 30, 2003, the FDIC has refused to do so. Accordingly, since the Company contends that it is entitled to the shares in the escrow, the Company expects to take all appropriate actions to seek the return of these shares, including if necessary the commencement of litigation against Keystone Holdings and the FDIC.

Note 3:    Mortgage Banking Activities

Changes in the portfolio of loans serviced for others were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
	(in millions)
Balance, beginning of period	$	591,917		$	459,375		$	604,504		$	382,500
Home loans:
Additions through acquisitions		–			–			–			49,242
Other additions		105,992			49,795			185,508			109,157
Sales		(2,960	)		–			(2,960	)		–
Loan payments and other		(110,867	)		(31,872	)		(203,423	)		(63,619	)
Net change in commercial real estate loans serviced for others		(259	)		11			194			29
Balance, end of period	$	583,823		$	477,309		$	583,823		$	477,309

Changes in the balance of mortgage servicing rights (“MSR”), net of the valuation allowance, were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
	(in millions)
Balance, beginning of period	$	5,210		$	7,955		$	5,341		$	6,241
Home loans:
Additions through acquisitions		–			–			–			926
Other additions		976			856			1,915			2,078
Amortization		(1,032	)		(504	)		(2,000	)		(983	)
Impairment provision		(309	)		(1,107	)		(272	)		(1,062	)
Sales		(247	)		(711	)		(388	)		(711	)
Net change in commercial real estate MSR		–			–			2			–
Balance, end of period(1)	$	4,598		$	6,489		$	4,598		$	6,489

⁽¹⁾ At June 30, 2003 and 2002, the aggregate mortgage servicing rights fair value was $4.63 billion and $6.49 billion.

9

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Changes in the valuation allowance for MSR were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
	(in millions)
Balance, beginning of period	$	3,864		$	1,669		$	4,521		$	1,714
Impairment provision		309			1,107			272			1,062
Other than temporary impairment		(579	)		–			(1,115	)		–
Sales		(150	)		(208	)		(234	)		(208	)
Balance, end of period	$	3,444		$	2,568		$	3,444		$	2,568

At June 30, 2003, the expected weighted average life of the Company’s MSR was 3 years. Projected amortization expense for the gross carrying value of MSR at June 30, 2003 is estimated to be as follows (in millions):

Remainder of 2003	$	1,654
2004		1,938
2005		1,158
2006		799
2007		581
2008		432
After 2008		1,480
Gross carrying value of MSR		8,042
Less: valuation allowance		(3,444	)
Net carrying value of MSR	$	4,598

The projected amortization expense of MSR is an estimate and should be used with caution. The amortization expense for future periods was calculated by applying the same quantitative factors, such as estimated MSR prepayment assumptions, that were used to determine amortization expense for the second quarter of 2003. These factors are inherently subject to significant fluctuations, primarily due to the effect that changes in mortgage rates have on loan prepayment experience. Accordingly, any projection of MSR amortization in future periods is limited by the conditions that existed at the time the calculations were performed, and may not be indicative of actual amortization expense that will be recorded in future periods.

Note 4:    Guarantees

In the ordinary course of business, the Company sells loans with recourse. For loans that have been sold with recourse, the recourse component is considered a guarantee. When the Company sells a loan with recourse, it commits to stand ready to perform, if the loan defaults, and to make payments to remedy the default. As of June 30, 2003 and December 31, 2002, loans sold with recourse totaled $3.61 billion and $4.26 billion. The Company’s recourse reserve related to these loans totaled $10 million and $11 million at June 30, 2003 and December 31, 2002.

The Company sells loans without recourse that may have to be subsequently repurchased due to defects that occurred during the loan’s origination process. The defects are categorized as documentation errors, underwriting errors and fraud. When a loan sold to an investor without recourse fails to perform according to its contractual terms, the investor will typically review the loan file to determine whether defects in the origination process

10

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

occurred. If a defect is identified, the Company may be required to either repurchase the loan or indemnify the investor for losses sustained. If there are no defects, the Company has no commitment to repurchase the loan. As of June 30, 2003 and December 31, 2002, the amount of loans sold without recourse totaled $583.17 billion and $600.25 billion, which substantially represents the unpaid principal balance of the Company’s loans serviced for others portfolio. The Company has reserved $115 million as of June 30, 2003 and $74 million as of December 31, 2002 to cover the estimated loss exposure related to the loan origination process defects that are inherent within this portfolio.

Note 5:    Operating Segments

The Company has identified three major operating segments for the purpose of management reporting: Banking and Financial Services; Home Loans and Insurance Services; and Specialty Finance. Unlike financial accounting, there is no comprehensive, authoritative guidance for management reporting. The management reporting process measures the performance of the operating segments based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. The Company’s operating segments are defined by the products and services they offer.

The Company uses various methodologies to assign certain balance sheet and income statement items to the responsible operating segment. Methodologies that are applied to the measurement of segment profitability include: (1) a funds transfer pricing system, which matches assets and liabilities with the market benchmark (approximation) of the Company’s cost of funds based on interest rate sensitivity and maturity characteristics and determines how much each interest margin source contributes to the Company’s total net interest income; (2) a calculation of the provision for loan and lease losses based on management’s current assessment of the long-term, normalized net charge-off ratio for loan products within each segment, which differs from the “losses inherent in the loan portfolio” methodology that is used to measure the allowance for loan and lease losses under accounting principles generally accepted in the United States of America. This methodology is used to provide segment management with provision information for strategic decision making; (3) the utilization of an activity-based costing approach to measure allocations of certain operating expenses that were not directly charged to the segments; (4) the allocation of goodwill and other intangible assets to the operating segments based on benefits received from each acquisition; (5) capital charges for goodwill as a component of an internal measurement of return on the goodwill allocated to the operating segment; and (6) an economic capital model which is the framework for assessing business performance on a risk-adjusted basis. Changing economic conditions, further research and new data may lead to the update of the capital allocation assumptions.

The Company continues to enhance its segment reporting process methodologies. Changes to the operating segment structure and the funds transfer pricing methodology were made during the first quarter of 2003. Additionally, effective January 1, 2003, the primary management responsibilities for the Company’s originated home loan mortgage-backed securities portfolio were transferred from the Home Loans and Insurance Services Group to the Company’s corporate treasury operations. Accordingly, the earnings performance and financial condition of this portfolio are now included within the Corporate Support/Treasury and Other category. Results for the prior periods have been restated to conform to all of these changes.

The Banking and Financial Services Group offers a comprehensive line of financial products and services to a broad spectrum of consumers and small- to mid-sized businesses. The Group offers various deposit products including the Group’s signature Free Checking accounts as well as other personal and business checking accounts, savings accounts, money market deposit accounts and time deposit accounts. It also offers consumer loans as well as small business and commercial loans to small- and mid-sized businesses. The Group’s services are offered through multiple delivery channels, including financial center stores, business banking centers, ATMs, the internet and 24-hour telephone banking centers.

11

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The principal activities of the Home Loans and Insurance Services Group include: originating and servicing the Company’s home loans, buying and selling home loans in the secondary market and managing the home loan portfolio. Home loans are either originated or purchased, and are either held in portfolio or held for sale and subsequently sold into the secondary market. The Group offers home loans through multiple distribution channels, which include retail home loan centers, financial center stores, correspondent channels, wholesale home loan centers and directly to consumers through call centers and the internet. The Home Loans Group also includes the Company’s community reinvestment functions and the activities of Washington Mutual Insurance Services, Inc., WaMu Capital Corp. and Washington Mutual Mortgage Securities Corp.

The Specialty Finance Group provides financing to developers, investors, mortgage bankers and homebuilders for the acquisition, construction and development of apartment buildings (“multi-family” lending), other commercial real estate and homes. The Group also services commercial real estate mortgages as part of its commercial asset management business and conducts a consumer finance business through Washington Mutual Finance Corporation.

The Corporate Support/Treasury and Other category includes management of the Company’s interest rate risk, liquidity, capital, borrowings, and investment securities and home loan mortgage-backed securities portfolios. To the extent not allocated to the business segments, this category also includes the costs of the Company’s technology services, facilities, legal, accounting and human resources. Also reported in this category is the net impact of funds transfer pricing for loan and deposit balances including the effects of changes in interest rates on the Company’s net interest margin and the effects of inter-segment allocations of gains and losses related to interest rate risk management instruments. The funds transfer pricing methodology isolates the majority of interest rate risk and concentrates it in our Treasury operations. It captures historical interest rate sensitivity of the balance sheet, risk management decisions within approved limits and the temporary divergence of funds transfer pricing assumptions from the actual duration of assets and liabilities. Certain basis and other residual risk remains in the operating segments.

12

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Financial highlights by operating segment were as follows:

	Three Months Ended June 30, 2003
	Banking and Financial Services			Home Loans and Insurance Services			Specialty Finance			Corporate Support/ Treasury and Other			Reconciling Adjustments				Total
	(dollars in millions)
Condensed income statement:
Net interest income (expense)	$	891		$	1,155		$	344		$	(365	)	$	–			$	2,025
Provision for loan and lease losses		38			46			52			8			(26	)(1)			118
Noninterest income (expense)		624			1,002			20			(17	)		–				1,629
Noninterest expense		949			903			114			164			(212	)(2)			1,918
Income taxes (benefit)		201			450			74			(215	)		88	(3)			598
Net income (loss)	$	327		$	758		$	124		$	(339	)	$	150			$	1,020
Performance and other data:																��
Efficiency ratio		54.84	%(4)		38.59	%(4)		25.00	%(4)		n/a			n/a				52.49	%(5)
Average loans	$	25,570		$	141,997		$	30,933		$	99		$	(383	)(6)		$	198,216
Average assets		33,998			176,709			34,814			38,980			(383	)(6)			284,118
Average deposits		125,025			30,257			3,393			5,005			n/a				163,680

	Three Months Ended June 30, 2002
	Banking and Financial Services			Home Loans and Insurance Services			Specialty Finance			Corporate Support/ Treasury and Other		Reconciling Adjustments			Total
	(dollars in millions)
Condensed income statement:
Net interest income	$	762		$	750		$	297		$	291	$	–		$	2,100
Provision for loan and lease losses		41			45			61			8		5	(1)		160
Noninterest income		541			600			19			48		–			1,208
Noninterest expense		880			668			96			150		(208	)(2)		1,586
Income taxes		145			242			60			51		74	(3)		572
Net income	$	237		$	395		$	99		$	130	$	129		$	990
Performance and other data:
Efficiency ratio		58.67	%(4)		44.36	%(4)		23.00	%(4)		n/a		n/a			47.95	%(5)
Average loans	$	20,627		$	118,996		$	29,722		$	13	$	(479	)(6)	$	168,879
Average assets		28,850			138,427			31,784			68,267		(479	)(6)		266,849
Average deposits		111,425			11,073			2,701			5,449		n/a			130,648

⁽¹⁾ Represents the difference between the long-term, normalized net charge-off ratio used to assess expected loan and lease losses for the operating segments and the “losses inherent in the loan portfolio” methodology used by the Company.

⁽²⁾ Represents the corporate offset for goodwill cost of capital allocated to segments.

⁽³⁾ Represents the tax effect of reconciling adjustments.

⁽⁴⁾ The efficiency ratio is defined as noninterest expense, excluding a cost of capital charge on goodwill, divided by total revenue (net interest income and noninterest income).

⁽⁵⁾ The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income).

⁽⁶⁾ Represents the corporate offset for allowance for loan and lease losses allocated to segments.

13

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	Six Months Ended June 30, 2003
	Banking and Financial Services			Home Loans and Insurance Services			Specialty Finance			Corporate Support/ Treasury and Other			Reconciling Adjustments			Total
	(dollars in millions)
Condensed income statement:
Net interest income (expense)	$	1,757		$	2,245		$	683		$	(643	)	$	–		$	4,042
Provision for loan and lease losses		75			85			103			14			(34	)(1)		243
Noninterest income (expense)		1,208			1,880			28			(81	)		–			3,035
Noninterest expense		1,868			1,676			219			285			(422	)(2)		3,626
Income taxes (benefit)		389			881			146			(399	)		168	(3)		1,185
Net income (loss)	$	633		$	1,483		$	243		$	(624	)	$	288		$	2,023
Performance and other data:
Efficiency ratio		55.08	%(4)		37.20	%(4)		24.39	%(4)		n/a			n/a			51.24	%(5)
Average loans	$	24,602		$	139,411		$	30,768		$	88		$	(386	)(6)	$	194,483
Average assets		33,205			174,496			34,437			40,724			(386	)(6)		282,476
Average deposits		124,716			27,757			3,198			5,138			n/a			160,809

	Six Months Ended June 30, 2002
	Banking and Financial Services			Home Loans and Insurance Services			Specialty Finance			Corporate Support/ Treasury and Other			Reconciling Adjustments			Total
	(dollars in millions)
Condensed income statement:
Net interest income	$	1,425		$	1,597		$	614		$	860		$	–		$	4,496
Provision for loan and lease losses		75			91			128			16			25	(1)		335
Noninterest income (expense)		1,054			993			43			(74	)		–			2,016
Noninterest expense		1,689			1,225			195			391			(392	)(2)		3,108
Income taxes		271			488			126			102			136	(3)		1,123
Net income	$	444		$	786		$	208		$	277		$	231		$	1,946
Performance and other data:
Efficiency ratio		59.29	%(4)		42.27	%(4)		23.11	%(4)		n/a			n/a			47.72	%(5)
Average loans	$	19,954		$	122,110		$	30,169		$	56		$	(480	)(6)	$	171,809
Average assets		28,021			141,451			32,200			74,359			(480	)(6)		275,551
Average deposits		107,820			10,854			2,700			5,895			n/a			127,269

⁽¹⁾ Represents the difference between the long-term, normalized net charge-off ratio used to assess expected loan and lease losses for the operating segments and the “losses inherent in the loan portfolio” methodology used by the Company.

⁽²⁾ Represents the corporate offset for goodwill cost of capital allocated to segments.

⁽³⁾ Represents the tax effect of reconciling adjustments.

⁽⁴⁾ The efficiency ratio is defined as noninterest expense, excluding a cost of capital charge on goodwill, divided by total revenue (net interest income and noninterest income).

⁽⁵⁾ The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income).

⁽⁶⁾ Represents the corporate offset for allowance for loan and lease losses allocated to segments.

14

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	Year Ended December 31, 2002
	Banking and Financial Services			Home Loans and Insurance Services			Specialty Finance			Corporate Support/ Treasury and Other			Reconciling Adjustments			Total
	(dollars in millions)
Condensed income statement:
Net interest income	$	3,018		$	3,409		$	1,262		$	652		$	–		$	8,341
Provision for loan and lease losses		160			187			271			34			(57	)(1)		595
Noninterest income (expense)		2,222			2,522			114			(68	)		–			4,790
Noninterest expense		3,508			2,661			400			631			(818	)(2)		6,382
Income taxes (benefit)		602			1,143			265			(73	)		321	(3)		2,258
Net income (loss)	$	970		$	1,940		$	440		$	(8	)	$	554		$	3,896
Performance and other data:
Efficiency ratio		58.24	%(4)		40.28	%(4)		22.55	%(4)		n/a			n/a			48.60	%(5)
Average loans	$	20,915		$	124,566		$	30,488		$	32		$	(468	)(6)	$	175,533
Average assets		29,071			151,537			32,653			58,674			(468	)(6)		271,467
Average deposits		113,250			13,730			2,836			4,885			n/a			134,701

	Year Ended December 31, 2001
	Banking and Financial Services			Home Loans and Insurance Services			Specialty Finance			Corporate Support/ Treasury and Other			Reconciling Adjustments			Total
	(dollars in millions)
Condensed income statement:
Net interest income	$	2,142		$	1,635		$	1,023		$	2,076		$	–		$	6,876
Provision for loan and lease losses		146			189			298			32			(90	)(1)		575
Noninterest income (expense)		1,793			1,474			74			(93	)		–			3,248
Noninterest expense		2,512			1,456			294			613			(258	)(2)		4,617
Income taxes		483			566			189			452			128	(3)		1,818
Net income	$	794		$	898		$	316		$	886		$	220		$	3,114
Performance and other data:
Efficiency ratio		61.89	%(4)		42.43	%(4)		22.73	%(4)		n/a			n/a			44.23	%(5)
Average loans	$	13,123		$	107,528		$	27,684		$	411		$	(432	)(6)	$	148,314
Average assets		17,931			121,603			29,261			57,210			(432	)(6)		225,573
Average deposits		82,384			7,860			2,613			3,665			n/a			96,522

⁽¹⁾ Represents the difference between the long-term, normalized net charge-off ratio used to assess expected loan and lease losses for the operating segments and the “losses inherent in the loan portfolio” methodology used by the Company.

⁽²⁾ Represents the corporate offset for goodwill cost of capital allocated to segments.

⁽³⁾ Represents the tax effect of reconciling adjustments.

⁽⁴⁾ The efficiency ratio is defined as noninterest expense, excluding a cost of capital charge on goodwill, divided by total revenue (net interest income and noninterest income).

⁽⁵⁾ The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income).

⁽⁶⁾ Represents the corporate offset for allowance for loan and lease losses allocated to segments.

15

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	Year Ended December 31, 2000
	Banking and Financial Services			Home Loans and Insurance Services			Specialty Finance			Corporate Support/ Treasury and Other			Reconciling Adjustments			Total
	(dollars in millions)
Condensed income statement:
Net interest income (expense)	$	2,061		$	1,645		$	822		$	(217	)	$	–		$	4,311
Provision for loan and lease losses		65			101			148			(1	)		(128	)(1)		185
Noninterest income (expense)		1,403			548			42			(9	)		–			1,984
Noninterest expense		2,010			679			215			361			(139	)(2)		3,126
Income taxes (benefit)		528			537			190			(267	)		97	(3)		1,085
Net income (loss)	$	861		$	876		$	311		$	(319	)	$	170		$	1,899
Performance and other data:
Efficiency ratio		56.80	%(4)		27.69	%(4)		21.94	%(4)		n/a			n/a			48.34	%(5)
Average loans	$	9,315		$	86,044		$	22,383		$	–			n/a		$	117,742
Average assets		12,441			109,130			22,839			43,162			n/a			187,572
Average deposits		78,074			1,213			191			798			n/a			80,276

⁽¹⁾ Represents the difference between the long-term, normalized net charge-off ratio used to assess expected loan and lease losses for the operating segments and the “losses inherent in the loan portfolio” methodology used by the Company.

⁽²⁾ Represents the corporate offset for goodwill cost of capital allocated to segments.

⁽³⁾ Represents the tax effect of reconciling adjustments.

⁽⁴⁾ The efficiency ratio is defined as noninterest expense, excluding a cost of capital charge on goodwill, divided by total revenue (net interest income and noninterest income).

⁽⁵⁾ The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income).

⁽⁶⁾ Represents the corporate offset for allowance for loan and lease losses allocated to segments.

16

MANAGEMENT’S DISCUSSION AND ANALYSIS

Cautionary Statements

Our Form 10-Q and other documents that we file with the Securities and Exchange Commission contain forward-looking statements. In addition, our senior management may make forward-looking statements orally to analysts, investors, the media and others. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could” or “may.”

Forward-looking statements provide our expectations or predictions of future conditions, events or results. They are not guarantees of future performance. By their nature, forward-looking statements are subject to risks and uncertainties. These statements speak only as of the date they are made. We do not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the date the forward-looking statements were made. There are a number of factors, many of which are beyond our control, that could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements. Some of these factors are:

• General business and economic conditions may significantly affect our earnings;

• If we are unable to effectively manage the volatility of our mortgage banking business, our earnings could be adversely affected;

• A failure to effectively implement our business operations technology solutions could adversely affect our earnings and financial condition;

• The financial services industry is highly competitive; and

• Changes in the regulation of financial services companies could adversely affect our business.

Controls and Procedures

An evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of June 30, 2003. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective.

We intend to review and evaluate the design and effectiveness of our disclosure controls and procedures on an ongoing basis and to improve our controls and procedures over time and to correct any deficiencies that we may discover in the future. Our goal is to ensure that our senior management has timely access to all material financial and non-financial information concerning our business. While we believe the present design of our disclosure controls and procedures is effective to achieve our goal, future events affecting our business may cause us to modify our disclosure controls and procedures.

Critical Accounting Policies

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in our Consolidated Financial Statements and accompanying notes. We believe that the judgments, estimates and assumptions used in the preparation of our Consolidated Financial Statements are appropriate given the factual circumstances as of June 30, 2003.

17

Various elements of our accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, we have identified four accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, and the sensitivity of our Consolidated Financial Statements to those judgments, estimates and assumptions, are critical to an understanding of our Consolidated Financial Statements. These policies relate to the valuation of our mortgage servicing rights (“MSR”) and rate lock commitments, the methodology that determines our allowance for loan and lease losses, and the assumptions used in the calculation of our net periodic pension expense.

Management has discussed the development and selection of these critical accounting policies with the Audit Committee of our Board of Directors. In addition, there are other complex accounting standards that require the Company to employ significant judgment in interpreting and applying certain of the principles prescribed by those standards. These judgments include, but are not limited to, the determination of whether a financial instrument or other contract meets the definition of a derivative in accordance with Statement of Financial Accounting Standards (“Statement”) No. 133,Accounting for Derivative Instruments and Hedging Activities, and the applicable hedge deferral criteria. These policies and the judgments, estimates and assumptions are described in greater detail in the Company’s 2002 Annual Report on Form 10-K in the “Critical Accounting Policies” section of Management’s Discussion and Analysis and in Note 1 to the Consolidated Financial Statements—“Summary of Significant Accounting Policies.”

Recently Issued Accounting Standards

Refer to Note 1 to the Consolidated Financial Statements—“Accounting Policies” for discussion of the recently issued accounting standards.

18

Summary Financial Data

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
	(dollars in millions, except per share amounts)
Profitability
Net interest income	$	2,025		$	2,100		$	4,042		$	4,496
Net interest margin		3.30	%		3.54	%		3.31	%		3.65	%
Noninterest income	$	1,629		$	1,208		$	3,035		$	2,016
Noninterest expense		1,918			1,586			3,626			3,108
Net income		1,020			990			2,023			1,946
Net income per common share:
Basic	$	1.12		$	1.04		$	2.21		$	2.04
Diluted		1.10			1.01			2.17			2.00
Basic weighted average number of common shares outstanding (in thousands)		910,921			954,662			915,974			951,177
Diluted weighted average number of common shares outstanding (in thousands)		929,386			974,153			932,109			968,717
Dividends declared per common share	$	0.30		$	0.26		$	0.59		$	0.51
Return on average assets		1.44	%		1.48	%		1.43	%		1.41	%
Return on average common equity		19.25			20.37			19.36			20.50
Efficiency ratio(1)		52.49			47.95			51.24			47.72
Asset Quality
Nonaccrual loans(2)	$	1,996		$	2,232		$	1,996		$	2,232
Foreclosed assets		317			274			317			274
Total nonperforming assets		2,313			2,506			2,313			2,506
Nonperforming assets/total assets		0.82	%		0.96	%		0.82	%		0.96	%
Restructured loans	$	89		$	119		$	89		$	119
Total nonperforming assets and restructured loans		2,402			2,625			2,402			2,625
Allowance for loan and lease losses		1,680			1,665			1,680			1,665
Allowance as a percentage of total loans held in portfolio		1.09	%		1.14	%		1.09	%		1.14	%
Provision for loan and lease losses	$	118		$	160		$	243		$	335
Net charge-offs		118			116			213			215
Capital Adequacy
Stockholders’ equity/total assets		7.44	%		7.50	%		7.44	%		7.50	%
Tangible common equity(3)/total tangible assets(3)		5.28			5.28			5.28			5.28
Estimated total risk-based capital/risk-weighted assets(4)		11.72			12.32			11.72			12.32
Per Common Share Data
Book value per common share(5)	$	23.22		$	20.50		$	23.22		$	20.50
Market prices:
High		43.90			39.45			43.90			39.45
Low		35.68			33.00			32.98			31.60
Period end		41.30			37.11			41.30			37.11

⁽¹⁾ The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income).

⁽²⁾ Excludes nonaccrual loans held for sale.

⁽³⁾ Excludes unrealized net gain/loss on available-for-sale securities and derivatives, goodwill and intangible assets, but includes MSR.

⁽⁴⁾ Estimate of what the total risk-based capital ratio would be if Washington Mutual, Inc. was a bank holding company that complies with Federal Reserve Board capital requirements.

⁽⁵⁾ Excludes shares held in escrow pending resolution of the Company’s asserted right to the return of such shares; there were 17,100,000 shares in the escrow at June 30, 2003, and 18,000,000 shares at June 30, 2002.

19

Summary Financial Data (Continued)

	Three Months Ended June 30,				Six Months Ended June 30,
	2003		2002		2003		2002
	(in millions, except per share amounts and ratios)
Supplemental Data
Average balance sheet:
Average loans held for sale	$	46,727	$	22,211	$	44,539	$	24,712
Average loans held in portfolio		151,489		146,668		149,944		147,097
Average interest-earning assets		246,021		236,504		243,868		245,789
Average total assets		284,118		266,849		282,476		275,551
Average interest-bearing deposits		120,144		108,231		119,560		104,743
Average noninterest-bearing deposits		43,536		22,417		41,249		22,526
Average stockholders’ equity		21,193		19,401		20,898		18,946
Period-end balance sheet:
Loans held for sale		40,631		21,940		40,631		21,940
Loans held in portfolio		152,186		144,208		152,186		144,208
Total interest-earning assets		245,345		230,852		245,345		230,852
Total assets		283,203		261,298		283,203		261,298
Total interest-bearing deposits		119,952		108,441		119,952		108,441
Total noninterest-bearing deposits		46,505		20,628		46,505		20,628
Total stockholders’ equity		21,061		19,597		21,061		19,597
Loan volume:
Home loans:
Adjustable rate		24,847		16,093		48,278		32,701
Fixed rate		78,650		30,999		148,160		70,230
Specialty mortgage finance		4,658		3,074		9,187		6,201
Total home loan volume		108,155		50,166		205,625		109,132
Total loan volume		120,322		57,779		226,942		123,466
Home loan refinancing		81,511		27,160		153,959		67,250
Total refinancing		83,620		28,398		157,480		69,464

Earnings Performance

Net Interest Income

For the three and six months ended June 30, 2003, net interest income decreased $75 million or 4% and $454 million or 10% compared with the same periods in 2002. These decreases resulted from contraction of the margin, which declined to 3.30% and 3.31% for the three and six months ended June 30, 2003 from 3.54% and 3.65% for the same periods in 2002, as yields on loans and debt securities continued to reprice downward from the higher interest rate environment of 2002. The decline in the margin was partially offset by decreases in the rates paid on interest-bearing deposits. In particular, the average rate paid on interest-bearing checking (Platinum) accounts decreased to 1.89% from 3.12% on an average balance of $54.94 billion and $30.49 billion for the three months ended June 30, 2003 and 2002, and decreased to 1.99% from 3.31% on an average balance of $53.68 billion and $23.83 billion for the six months ended June 30, 2003 and 2002. The free funding impact of noninterest-bearing sources that resulted from higher average custodial and escrow balances also offset the contraction in the margin for the three and six months ended June 30, 2003, by 16 and 15 basis points when compared with the same periods in 2002. Higher average balances of loans held for sale and home equity loans and lines of credit during the second quarter and first half of 2003, as compared with the same periods in the prior year, further reduced the decline in net interest income.

20

Interest rate contracts, including embedded derivatives, held for asset/liability interest rate risk management purposes decreased net interest income by $151 million and $294 million for the three and six months ended June 30, 2003, compared with $92 million and $129 million for the same periods in 2002.

Certain average balances, together with the total dollar amounts of interest income and expense and the weighted average interest rates, were as follows:

	Three Months Ended June 30,
	2003						2002
	Average Balance		Rate		Interest Income		Average Balance		Rate		Interest Income
	(dollars in millions)
Assets
Interest-earning assets:
Federal funds sold and securities purchased under resale agreements	$	3,448	1.29	%	$	11	$	1,995	1.89	%	$	10
Available-for-sale securities(1):
Mortgage-backed securities		24,087	5.22			314		22,471	5.96			335
Investment securities		14,969	4.15			155		38,436	4.97			477
Loans held for sale(2)		46,727	5.36			626		22,211	6.50			361
Loans held in portfolio(2)(3):
Loans secured by real estate:
Home loans		83,426	4.95			1,033		86,315	6.02			1,299
Purchased specialty mortgage finance		10,475	5.50			144		9,028	6.39			144
Total home loans		93,901	5.01			1,177		95,343	6.05			1,443
Home construction loans:
Builder(4)		1,103	4.77			13		1,379	6.15			21
Custom(5)		927	7.48			17		893	8.58			19
Home equity loans and lines of credit:
Banking subsidiaries		19,238	5.13			246		12,819	6.01			193
Washington Mutual Finance		2,041	11.77			60		2,116	12.16			64
Multi-family		19,036	5.34			255		17,425	5.98			261
Other real estate		7,306	6.25			114		8,410	6.71			142
Total loans secured by real estate		143,552	5.25			1,882		138,385	6.19			2,143
Consumer:
Banking subsidiaries		1,253	8.93			28		2,719	9.31			63
Washington Mutual Finance		1,732	19.61			85		1,702	18.68			79
Commercial business		4,952	4.38			55		3,862	5.13			50
Total loans held in portfolio		151,489	5.41			2,050		146,668	6.37			2,335
Other		5,301	4.61			61		4,723	5.67			67
Total interest-earning assets		246,021	5.23			3,217		236,504	6.06			3,585
Noninterest-earning assets:
Mortgage servicing rights		4,754						7,828
Goodwill		6,253						6,152
Other		27,090						16,365
Total assets	$	284,118					$	266,849

(This table is continued on the next page.)

⁽¹⁾ The average balance and yield are based on average amortized cost balances.

⁽²⁾ Nonaccrual loans are included in the average loan amounts outstanding.

⁽³⁾ Interest income for loans held in portfolio includes amortization of net deferred loan origination costs of $78 million and $47 million for the three months ended June 30, 2003 and 2002.

⁽⁴⁾ Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale.

⁽⁵⁾ Represents construction loans made directly to the intended occupant of a single-family residence.

21

(Continued from the previous page.)

	Three Months Ended June 30,
	2003						2002
	Average Balance		Rate		Interest Expense		Average Balance		Rate		Interest Expense
	(dollars in millions)
Liabilities
Interest-bearing liabilities:
Deposits:
Interest-bearing checking	$	60,597	1.74	%	$	262	$	36,991	2.65	%	$	245
Savings accounts and money market deposit accounts		28,229	0.98			69		32,249	1.51			122
Time deposit accounts		31,318	2.77			217		38,991	3.09			299
Total interest-bearing deposits		120,144	1.83			548		108,231	2.47			666
Federal funds purchased and commercial paper		3,843	1.37			13		3,562	1.96			17
Securities sold under agreements to repurchase		20,040	2.66			134		35,812	2.44			218
Advances from Federal Home Loan Banks		51,916	2.56			334		59,651	2.75			410
Other		14,898	4.37			163		13,976	4.98			174
Total interest-bearing liabilities		210,841	2.26			1,192		221,232	2.69			1,485
Noninterest-bearing sources:
Noninterest-bearing deposits		43,536						22,417
Other liabilities		8,548						3,799
Stockholders’ equity		21,193						19,401
Total liabilities and stockholders’ equity	$	284,118					$	266,849
Net interest spread and net interest income			2.97		$	2,025			3.37		$	2,100
Impact of noninterest-bearing sources			0.33						0.17
Net interest margin			3.30						3.54

22

	Six Months Ended June 30,
	2003						2002
	Average Balance		Rate		Interest Income		Average Balance		Rate		Interest Income
	(dollars in millions)
Assets
Interest-earning assets:
Federal funds sold and securities purchased under resale agreements	$	4,286	1.27	%	$	27	$	1,569	1.79	%	$	14
Available-for-sale securities(1):
Mortgage-backed securities		25,142	5.26			661		23,852	5.66			676
Investment securities		14,979	4.35			325		43,822	4.96			1,083
Loans held for sale(2)		44,539	5.46			1,216		24,712	6.51			804
Loans held in portfolio(2)(3):
Loans secured by real estate:
Home loans		83,255	5.08			2,116		87,255	6.10			2,661
Purchased specialty mortgage finance		10,286	5.72			294		8,785	6.64			292
Total home loans		93,541	5.15			2,410		96,040	6.15			2,953
Home construction loans:
Builder(4)		1,080	4.90			27		1,473	6.09			44
Custom(5)		923	7.61			35		911	8.14			37
Home equity loans and lines of credit:
Banking subsidiaries		18,248	5.28			480		11,966	6.01			360
Washington Mutual Finance		2,004	11.91			118		2,106	12.05			127
Multi-family		18,758	5.50			516		17,483	6.16			539
Other real estate		7,525	6.30			237		8,417	6.88			289
Total loans secured by real estate		142,079	5.39			3,823		138,396	6.29			4,349
Consumer:
Banking subsidiaries		1,293	8.94			57		2,784	9.32			130
Washington Mutual Finance		1,728	19.57			168		1,715	18.59			159
Commercial business		4,844	4.42			107		4,202	5.12			108
Total loans held in portfolio		149,944	5.55			4,155		147,097	6.45			4,746
Other		4,978	5.05			125		4,737	6.15			145
Total interest-earning assets		243,868	5.34			6,509		245,789	6.08			7,468
Noninterest-earning assets:									��
Mortgage servicing rights		5,103						7,419
Goodwill		6,259						5,875
Other		27,246						16,468
Total assets	$	282,476					$	275,551

(This table is continued on the next page.)

⁽¹) The average balance and yield are based on average amortized cost balances.

⁽²⁾ Nonaccrual loans are included in the average loan amounts outstanding.

⁽³⁾ Interest income for loans held in portfolio includes amortization of net deferred loan origination costs of $139 million and $104 million for the six months ended June 30, 2003 and 2002.

⁽⁴⁾ Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale.

⁽⁵⁾ Represents construction loans made directly to the intended occupant of a single-family residence.

23

(Continued from the previous page.)

	Six Months Ended June 30,
	2003						2002
	Average Balance		Rate		Interest Expense		Average Balance		Rate		Interest Expense
	(dollars in millions)
Liabilities
Interest-bearing liabilities:
Deposits:
Interest-bearing checking	$	59,416	1.83	%	$	538	$	30,468	2.70	%	$	407
Savings accounts and money market deposit accounts		28,056	1.03			143		33,771	1.54			262
Time deposit accounts		32,088	2.85			454		40,504	3.20			648
Total interest-bearing deposits		119,560	1.91			1,135		104,743	2.52			1,317
Federal funds purchased and commercial paper		3,118	1.42			22		4,558	1.94			45
Securities sold under agreements to repurchase		20,205	2.71			274		44,582	1.95			431
Advances from Federal Home Loan Banks		53,869	2.64			712		62,461	2.69			833
Other		15,208	4.26			324		14,066	4.96			346
Total interest-bearing liabilities		211,960	2.34			2,467		230,410	2.59			2,972
Noninterest-bearing sources:
Noninterest-bearing deposits		41,249						22,526
Other liabilities		8,369						3,669
Stockholders’ equity		20,898						18,946
Total liabilities and stockholders’ equity	$	282,476					$	275,551
Net interest spread and net interest income			3.00		$	4,042			3.49		$	4,496
Impact of noninterest-bearing sources			0.31						0.16
Net interest margin			3.31						3.65

24

Noninterest Income

Noninterest income consisted of the following:

	Three Months Ended June 30,						Percentage Change		Six Months Ended June 30,						Percentage Change
	2003			2002					2003			2002
	(dollars in millions)
Home loan mortgage banking income (expense):
Loan servicing income:
Loan servicing fees	$	593		$	560		6	%	$	1,206		$	1,100		10	%
Loan subservicing fees		7			38		(82	)		12			53		(77	)
Amortization of mortgage servicing rights		(1,032	)		(504	)	105			(2,000	)		(983	)	103
Mortgage servicing rights impairment		(309	)		(1,107	)	(72	)		(272	)		(1,062	)	(74	)
Other, net		(168	)		(78	)	115			(306	)		(140	)	119
Net home loan servicing expense		(909	)		(1,091	)	(17	)		(1,360	)		(1,032	)	32
Revaluation gain from derivatives		598			857		(30	)		815			842		(3	)
Net settlement income from certain interest-rate swaps		84			101		(17	)		224			107		109
Gain from mortgage loans		622			220		183			1,210			471		157
GNMA pool buy-out income		219			78		181			373			91		310
Loan related income		91			61		49			166			132		26
Gain from sale of originated mortgage- backed securities		–			18		(100	)		1			20		(95	)
Total home loan mortgage banking income		705			244		189			1,429			631		126
Depositor and other retail banking fees		454			398		14			875			759		15
Securities fees and commissions		100			98		2			189			180		5
Insurance income		53			39		36			105			86		22
Portfolio loan related income		111			75		48			227			140		62
Gain (loss) from other available-for-sale securities		137			137		–			131			(161	)	–
(Loss) gain on extinguishment of securities sold under agreements to repurchase		(49	)		121		–			(136	)		195		–
Other income		118			96		23			215			186		16
Total noninterest income	$	1,629		$	1,208		35		$	3,035		$	2,016		51

25

Home Loan Mortgage Banking Income (Expense)

The increase in home loan servicing fees for the three and six months ended June 30, 2003 was the result of the increase in our loans serviced for others portfolio, partially offset by a decline in the aggregate weighted average servicing fee. Our loans serviced for others portfolio increased from $477.31 billion at June 30, 2002 to $583.82 billion at June 30, 2003 primarily as a result of the acquisition of HomeSide Lending, Inc., including its servicing portfolio, in the fourth quarter of 2002.

Total loans serviced for others portfolio by type was as follows:

	June 30, 2003
	Unpaid Principal Balance		Weighted Average Servicing Fee
	(in millions)		(in basis points, annualized)
Government	$	74,618	53
Agency		387,922	30
Private		106,449	40
Specialty home loans		14,834	50
Total loans serviced for others portfolio(1)	$	583,823	36

⁽¹⁾ Weighted average coupon (annualized) was 6.44% at June 30, 2003.

The weighted average servicing fee decreased from 41 basis points at June 30, 2002 to 36 basis points at June 30, 2003 largely due to the Company’s continuing process of selling a portion of the future contractual servicing cash flows to third parties. This process decreased the net MSR balance by $664 million but had no impact on the unpaid principal balance of the loans serviced for others portfolio.

Historically low long-term mortgage rates led to higher anticipated prepayment rates, which resulted in MSR impairment of $309 million during the second quarter of 2003. Higher levels of prepayment activity during the three and six months ended June 30, 2003 resulted in higher MSR amortization, as compared with the same periods in 2002.

For the three and six months ended June 30, 2003, we recorded an other than temporary MSR impairment of $579 million and $1,115 million, which reduced both the gross carrying value of the MSR and the MSR valuation allowance. The amounts of the other than temporary impairment were determined by selecting an appropriate interest rate shock to estimate the amount of MSR fair value that might be expected to recover in the foreseeable future. To the extent that the gross carrying value of the MSR exceeded the estimated recoverable amount, that portion of the gross carrying value was written off as an other than temporary impairment. Although the writedowns had no impact on our results of operations or financial condition, they did reduce the gross carrying value of the MSR, which is used as the basis for MSR amortization.

The increase in other home loan mortgage banking expense for the three and six months ended June 30, 2003 resulted from higher loan pool expenses due to significant refinancing activity. Loan pool expenses represent the amount of interest expense that the Company incurs for the elapsed time between the borrower payoff date and the next monthly loan servicing investor pool cutoff date.

26

In measuring the fair value of MSR, we stratify the loans in our servicing portfolio based on loan type and coupon rate. We measure MSR impairment by estimating the fair value of each stratum. An impairment allowance for a stratum is recorded when, and in the amount by which, its fair value is less than its gross carrying value. A recovery of the impairment allowance for a stratum is recorded when its fair value exceeds its net carrying value. At June 30, 2003, we stratified the loans in our servicing portfolio as follows:

		June 30, 2003
	Rate Band	Gross Carrying Value		Valuation Allowance		Net Carrying Value		Fair Value
		(in millions)
Adjustable	All loans	$	1,615	$	473	$	1,142	$	1,142
Conventional	6.00% and below		1,626		718		908		908
Conventional	6.01% to 7.49%		2,068		1,115		953		953
Conventional	7.50% and above		373		121		252		252
Government	6.00% and below		196		85		111		111
Government	6.01% to 7.49%		777		406		371		371
Government	7.50% and above		399		102		297		297
Private	6.00% and below		257		136		121		121
Private	6.01% to 7.49%		359		195		164		164
Private	7.50% and above		161		43		118		118
Primary Servicing			7,831		3,394		4,437		4,437
Master servicing	All loans		113		50		63		63
Specialty home loans	All loans		76		–		76		107
Multi-family	All loans		22		–		22		23
Total		$	8,042	$	3,444	$	4,598	$	4,630

Since loans with coupon rates at or below 6.00% reached a significant level, the Company adjusted the strata of the loan servicing portfolio during the second quarter of 2003 to the rate bands illustrated in the table above. This change did not have a significant impact on the MSR valuation allowance as of June 30, 2003.

27

At June 30, 2003, key economic assumptions and the sensitivity of the current fair value for home loans MSR to immediate changes in those assumptions were as follows:

	June 30, 2003
	Mortgage Servicing Rights
	Fixed-Rate Mortgage Loans						Adjustable- Rate Mortgage Loans			Specialty Home Loans
	Government Sponsored Enterprise			Privately Issued			All Types
	(dollars in millions)
Fair value of home loans MSR	$	2,893		$	402		$	1,142		$	107
Expected-weighted-average life (in years)		2.9			2.9			3.6			1.9
Constant prepayment rate(1)		36.21	%		40.35	%		29.40	%		41.39	%
Impact on fair value of 25% decrease	$	885		$	150		$	254		$	26
Impact on fair value of 50% decrease		2,206			376			638			65
Impact on fair value of 25% increase		(642	)		(109	)		(185	)		(19	)
Impact on fair value of 50% increase		(1,252	)		(210	)		(338	)		(35	)
Future cash flows discounted at		8.36	%		9.85	%		9.98	%		19.17	%
Impact on fair value of 10% decrease		n/a			n/a			n/a		$	2
Impact on fair value of 25% decrease	$	131		$	20		$	79			6
Impact on fair value of 50% decrease		276			43			171			n/a
Impact on fair value of 25% increase		(118	)		(18	)		(68	)		(5	)
Impact on fair value of 50% increase		(225	)		(34	)		(127	)		(10	)

⁽¹⁾ Represents the expected lifetime average.

These sensitivities are hypothetical and should be used with caution. As the table above demonstrates, our methodology for estimating the fair value of MSR is highly sensitive to changes in assumptions. For example, our determination of fair value uses anticipated prepayment speeds. Actual prepayment experience may differ and any difference may have a material effect on MSR fair value. Changes in fair value based on a variation in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the MSR is calculated without changing any other assumption; in reality, changes in one factor may be associated with changes in another (for example, increases in market interest rates may result in lower prepayments, but credit losses may increase), which may magnify or counteract the sensitivities. Thus, any measurement of MSR fair value is limited by the conditions existing and assumptions made as of a particular point in time. Those assumptions may not be appropriate if they are applied to a different point in time. Refer to “Market Risk Management” for discussion of how MSR prepayment risk is managed and to Note 1 to the Consolidated Financial Statements—“Summary of Significant Accounting Policies” in the Company’s 2002 Annual Report on Form 10-K for further discussion of how MSR impairment is measured.

As part of its mortgage banking activities, the Company enters into commitments to originate or purchase loans whereby the interest rate on the loan is set prior to funding (rate lock commitments). Rate lock commitments on mortgage loans that are intended to be sold are considered to be derivatives. Therefore, they are recorded at fair value on the Consolidated Statements of Financial Condition with changes in fair value recorded in gain from mortgage loans on the Consolidated Statements of Income. In measuring the fair value of rate lock commitments, the amount of the expected servicing rights is included in the valuation. This value is calculated using the same methodologies as are used to value the Company’s MSR, adjusted using an anticipated fallout factor for loan commitments that will never be funded. The fair value of rate lock commitments on the Consolidated Statements of Financial Condition at June 30, 2003 and 2002 for which the underlying loans had not been funded was $210 million and $107 million.

28

This policy of recognizing the value of the derivative has the effect of recognizing the gain from mortgage loans before the loans are sold. The Financial Accounting Standards Board (“FASB”) staff or the Emerging Issues Task Force may issue additional guidance on this matter. Depending on what, if any, additional guidance is issued, the timing of the gain recognition inherent within our rate lock commitments could be delayed, possibly until the date that the anticipated loans are sold. Generally, loans held for sale are sold within 60 to 120 days after the initial recognition of the rate lock commitment.

Rate lock commitment volume, adjusted for actual and anticipated fallout factors, totaled $101.08 billion and $194.74 billion for the three and six months ended June 30, 2003, compared with $44.29 billion and $84.90 billion for the same periods in 2002.

The fair value changes in loans held for sale and the offsetting changes in the derivative instruments used as fair value hedges are also recorded within gain from mortgage loans when hedge accounting treatment is achieved. Loans held for sale where hedge accounting treatment is not achieved (“nonqualifying” loans held for sale) are not recorded at fair value and are instead recorded at the lower of aggregate cost or market value. Due to decreases in the fair value of derivatives acquired to mitigate the risk of fair value changes to these nonqualifying loans, losses of $147 million and $342 million were recognized in revaluation gain (loss) from derivatives during the three and six months ended June 30, 2003. A gain may be recognized when the loans are subsequently sold if the fair value of those loans is higher than the carrying amount. As of June 30, 2003, the fair value of loans held for sale and the carrying amount were $40.63 billion, and as of December 31, 2002, the fair value was $34.06 billion with a carrying amount of $34.00 billion.

The high levels of rate lock commitment volume and the sale of nonqualifying loans held for sale resulted in a gain from mortgage loans of $622 million and $1,210 million during the three and six months ended June 30, 2003, compared with $220 million and $471 million during the same periods in 2002.

The following tables separately present the MSR, loans held for sale and the asset/liability risk management activities included within noninterest income for the three and six months ended June 30, 2003.

	Three Months Ended June 30, 2003
	MSR Risk Management		Loans Held for Sale Risk Management			Asset/ Liability Risk Management			Total
	(in millions)
Revaluation gain (loss) from derivatives	$	745	$	(147	)	$	–		$	598
Net settlement income from certain interest-rate swaps		84		–			–			84
Gain (loss) from other available-for-sale securities		140		–			(3	)		137
Total	$	969	$	(147	)	$	(3	)	$	819

	Six Months Ended June 30, 2003
	MSR Risk Management		Loans Held for Sale Risk Management			Asset/ Liability Risk Management			Total
	(in millions)
Revaluation gain (loss) from derivatives	$	1,157	$	(342	)	$	–		$	815
Net settlement income from certain interest-rate swaps		224		–			–			224
Gain (loss) from other available-for-sale securities		140		–			(9	)		131
Total	$	1,521	$	(342	)	$	(9	)	$	1,170

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Revaluation gain from derivatives is the earnings impact of the changes in fair value from certain derivatives where the Company either has not attempted to achieve, or has attempted but did not achieve, hedge accounting treatment under Statement No. 133. The revaluation gain from derivatives during the three and six months ended June 30, 2003 resulted from the Company’s continued usage of derivative instruments for interest rate risk management purposes. Derivatives that were used for MSR risk management purposes produced a revaluation gain of $745 million and $1,157 million during the three and six months ended June 30, 2003, compared with gains of $857 million and $842 million for the same periods in 2002. The total notional amount of these MSR risk management derivatives at June 30, 2003 was $32.07 billion with a combined net fair value of $554 million.

Net settlement income from certain interest-rate swaps consisted of receive-fixed interest rate swaps, which were used as MSR risk management derivatives. At June 30, 2003, the total notional amount of these receive-fixed interest-rate swaps was $8.15 billion, compared with $11.58 billion at June 30, 2002.

Gain from other available-for-sale securities of $140 million for the three and six months ended June 30, 2003 resulted from sales of approximately $1.69 billion in mortgage-backed securities and investment securities, all of which were designated as MSR risk management instruments.

Government National Mortgage Association (“GNMA”) pool buy-out income was $219 million and $373 million for the three and six months ended June 30, 2003 and $78 million and $91 million for the same periods in 2002. Beginning in September of 2002, the Company began to regularly exercise its buy-back rights under the terms of its contract with GNMA. The Company has the right to repurchase certain loans that are part of GNMA securitization pools before they have reached nonperforming status. In one part of the Company’s program, loans that have been 30 days past due for three consecutive months (referred to as “rolling 30 loans”) are repurchased from GNMA and then resold in the secondary market. In the other, loans that have missed three consecutive payments are likewise purchased and resold. These loans are collectively referred to as Early Buy-Out Loans.

Gain from the sale of these loans was $152 million and $228 million for the three and six months ended June 30, 2003 and $19 million and $22 million for the three and six months ended June 30, 2002. The Company does not have the option of repurchasing “rolling 30 loans” from pools created after January 1, 2003, but continues to make such purchases from previously created pools. The Company does not expect this change to have a significant impact on its results of operations throughout the remainder of 2003.

Additionally, as part of its normal Federal Housing Administration and Department of Veterans Affairs lending program, the Company repurchases defaulted loans from GNMA and undertakes collection and, if necessary, foreclosure proceedings with respect to those loans. Upon completion of the foreclosure, the Company can also submit a claim to either the Federal Housing Administration or the Department of Veterans Affairs for payment on the insurance or guarantee, as the case may be, issued by that agency. The portion of the recovery which is attributed to interest income owed to the Company is also recorded in this category. That interest income, together with interest income on the Early Buy-Out Loans was $67 million and $145 million for the three and six months ended June 30, 2003 and $59 million and $69 million for the three and six months ended June 30, 2002.

Loan related income increased during the three and six months ended June 30, 2003, primarily due to increased fees charged to our correspondent lenders and late charges on the loans serviced for others portfolio.

All Other Noninterest Income Analysis

The increase in depositor and other retail banking fees for the three and six months ended June 30, 2003 was primarily due to higher levels of checking fees that resulted from an increased number of noninterest-bearing checking accounts in comparison with the three and six months ended June 30, 2002 and an increase in debit card and ATM related income. The number of noninterest-bearing checking accounts at June 30, 2003 totaled approximately 6.1 million, an increase of more than 600,000 from June 30, 2002.

30

Insurance income increased during the three and six months ended June 30, 2003 primarily due to the continued growth in our captive reinsurance programs.

The growth in portfolio loan related income for the three and six months ended June 30, 2003 was primarily due to increased late charges on the loan portfolio and continued high loan prepayment fees as a result of refinancing activity.

Several securities sold under agreements to repurchase (“repurchase agreements”) that contained embedded pay-fixed swaps were restructured during the first half of 2003, resulting in losses on extinguishment of repurchase agreements of $49 million and $136 million for the three and six months ended June 30, 2003. The restructured repurchase agreements contain embedded pay-fixed swaps with the same terms except with a lower pay rate.

Other noninterest income for the three and six months ended June 30, 2003 increased largely due to a revaluation gain recognized on residual interests in collateralized mortgage obligations.

Noninterest Expense

Noninterest expense consisted of the following:

	Three Months Ended June 30,				Percentage Change		Six Months Ended June 30,				Percentage Change
	2003		2002				2003		2002
	(dollars in millions)
Compensation and benefits	$	867	$	732	18	%	$	1,638	$	1,422	15	%
Occupancy and equipment		375		283	33			679		571	19
Telecommunications and outsourced information services		143		134	7			287		273	5
Depositor and other retail banking losses		50		48	4			102		98	4
Amortization of other intangible assets		15		17	(12	)		31		34	(9	)
Advertising and promotion		83		69	20			146		113	29
Professional fees		68		52	31			124		107	16
Postage		59		41	44			113		87	30
Loan expense		61		45	36			120		89	35
Travel and training		42		39	8			75		71	6
Reinsurance expense		15		10	50			31		24	29
Other expense		140		116	21			280		219	28
Total noninterest expense	$	1,918	$	1,586	21		$	3,626	$	3,108	17

The increase in employee base compensation and benefits expense for the three and six months ended June 30, 2003 over the same periods in 2002 was substantially due to the hiring of additional staff to support our expanding operations. Full-time equivalent employees were 57,516 at June 30, 2003, compared with 50,001 at June 30, 2002. Overtime and second shifts have grown in response to the increased loan production and loan payoff processing. The Company’s variable compensation and benefits expense related to loan servicing activities, which include loan payoff processing, and loan production for the three and six months ended June 30, 2003 was $243 million and $433 million compared with $197 million and $363 million for the same periods in 2002.

The increase in occupancy and equipment expense for the three months ended June 30, 2003 resulted partially from higher equipment depreciation expense of $21 million related to various technology related projects that were placed in service during the second quarter of 2003. Occupancy expense increased for the period by $17 million due to continued branch expansions into new markets. Additionally, during the second quarter of 2003, the Company recorded an expense of $20 million, which represented a vendor payment to obtain the rights necessary to ensure the sustained functionality of certain mortgage loan origination system software. The Company also wrote-off approximately $16 million of capitalized software that was no longer considered to have future value.

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Professional fees increased for the three and six months ended June 30, 2003, primarily as a result of increased technology related projects and legal fees.

The increase in loan expense for the three and six months ended June 30, 2003 was substantially due to higher non-deferred loan closing costs and mortgage payoff expenses, resulting from an overall increase in refinancing activity.

Other expense increased during the periods reported mostly due to higher foreclosed asset expenses, outside services and charitable contributions.

Review of Financial Condition

Assets

At June 30, 2003, our assets were $283.20 billion, an increase of 6% from $268.30 billion at December 31, 2002. The increase was predominantly due to an increase in investment securities, loans held for sale and loans held in portfolio.

Securities

Securities consisted of the following:

	June 30, 2003
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(in millions)
Available-for-sale securities
Mortgage-backed securities:
U.S. Government and agency	$	16,860	$	538	$	(12	)	$	17,386
Private issue		7,225		266		(2	)		7,489
Total mortgage-backed securities		24,085		804		(14	)		24,875
Investment securities:
U.S. Government and agency		18,779		1,040		(5	)		19,814
Other debt securities		314		22		–			336
Equity securities		128		14		–			142
Total investment securities		19,221		1,076		(5	)		20,292
Total available-for-sale securities	$	43,306	$	1,880	$	(19	)	$	45,167

	December 31, 2002
	Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
	(in millions)
Available-for-sale securities
Mortgage-backed securities:
U.S. Government and agency	$	19,649	$	583	$	(5	)	$	20,227
Private issue		7,940		216		(8	)		8,148
Total mortgage-backed securities		27,589		799		(13	)		28,375
Investment securities:
U.S. Government and agency		14,560		581		(4	)		15,137
Other debt securities		309		16		–			325
Equity securities		134		3		(2	)		135
Total investment securities		15,003		600		(6	)		15,597
Total available-for-sale securities	$	42,592	$	1,399	$	(19	)	$	43,972

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	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
	(in millions)
Available-for-sale securities
Realized gross gains	$	175		$	201		$	177		$	327
Realized gross losses		(38	)		(46	)		(45	)		(468	)
Realized net gain (loss)	$	137		$	155		$	132		$	(141	)

Our mortgage-backed securities portfolio declined $3.50 billion to $24.88 billion at June 30, 2003 from $28.38 billion at December 31, 2002. Substantially all of this decrease resulted from pay-downs that occurred from refinancing activity. Our investment securities portfolio increased $4.69 billion to $20.29 billion at June 30, 2003 from $15.60 billion at December 31, 2002. This increase resulted from the purchase of U.S. Government and agency investment securities. The Company’s available-for-sale securities portfolio includes both mortgage-backed securities and investment securities that are used for MSR risk management purposes. At June 30, 2003, these MSR risk management securities had a total amortized cost of $10.63 billion and a fair value of $11.03 billion. At December 31, 2002, these MSR risk management securities had a total amortized cost of $7.85 billion and a fair value of $8.08 billion.

Loans

Loans held in portfolio consisted of the following:

	June 30, 2003		December 31, 2002
	(in millions)
Loans secured by real estate:
Home loans	$	83,839	$	82,842
Purchased specialty mortgage finance		10,836		10,128
Total home loans		94,675		92,970
Home construction loans:
Builder(1)		1,121		1,017
Custom(2)		963		932
Home equity loans and lines of credit:
Banking subsidiaries		20,505		16,168
Washington Mutual Finance		2,073		1,930
Multi-family		19,482		18,000
Other real estate		7,122		7,986
Total loans secured by real estate		145,941		139,003
Consumer:
Banking subsidiaries		1,207		1,663
Washington Mutual Finance		1,743		1,729
Commercial business		4,975		5,133
Total loans held in portfolio	$	153,866	$	147,528

⁽¹⁾ Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale.

⁽²⁾ Represents construction loans made directly to the intended occupant of a single-family residence.

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Other Assets

Other assets consisted of the following:

	June 30, 2003		December 31, 2002
	(in millions)
Premises and equipment	$	3,107	$	2,862
Investment in bank-owned life insurance		2,607		2,544
Accrued interest receivable		1,374		1,439
Foreclosed assets		317		336
GNMA pool buy-outs		4,311		4,859
Other intangible assets		280		311
Derivatives		1,952		4,105
Trading securities		1,366		336
Other		5,985		3,126
Total other assets	$	21,299	$	19,918

The decrease in the derivatives balance from December 31, 2002 to June 30, 2003 was largely due to a decrease in the net fair value of receive-fixed swaps held for MSR risk management purposes. The decrease in the net fair value of the receive-fixed swaps was primarily attributable to the sales of certain of those swaps with higher receive-fixed rates and thus a higher net fair value. The net fair value of the receive-fixed swaps used for MSR risk management purposes was $274 million at June 30, 2003, compared with $2.18 billion at December 31, 2002.

The increase in trading securities is a result of growth in mortgage-backed securities held by WaMu Capital Corp., the Company’s institutional broker-dealer.

A majority of the increase in other assets—other was due to the sale in June 2003 of repurchase agreements where we had not yet settled with the counterparty as of June 30, 2003.

Deposits

Deposits consisted of the following:

	June 30, 2003		December 31, 2002
	(in millions)
Checking accounts:
Interest bearing	$	61,440	$	56,132
Noninterest bearing		43,702		35,730
		105,142		91,862
Savings accounts		11,267		10,313
Money market deposit accounts		19,383		19,573
Time deposit accounts		30,665		33,768
Total deposits	$	166,457	$	155,516

Deposits increased to $166,457 million at June 30, 2003 from $155,516 million at December 31, 2002. Substantially all of the increase in interest-bearing checking accounts was due to the growth in Platinum Accounts, which increased from $50.20 billion at December 31, 2002 to $55.90 billion at June 30, 2003. Approximately $4.10 billion of this $5.70 billion increase in Platinum Account deposits occurred during the first quarter of 2003. During the six months ended June 30, 2003, the number of Platinum Accounts increased by

34

153,847 from 683,245 to 837,092 total accounts. At June 30, 2003, total deposits included $32.95 billion in custodial/escrow deposits related to loan servicing activities, compared with $25.90 billion at December 31, 2002. Time deposit accounts decreased by $3.10 billion from year-end 2002 primarily as a result of decreases in certificates of deposit accounts.

Checking accounts, savings accounts and money market deposit accounts increased to 82% of total deposits at June 30, 2003, compared with 78% at year-end 2002. These products generally have the benefit of lower interest costs, compared with time deposit accounts. At June 30, 2003 deposits funded 59% of total assets compared with 58% at December 31, 2002.

Borrowings

Our borrowings largely take the form of repurchase agreements and advances from the Federal Home Loan Banks (“FHLB”) of Seattle, San Francisco, Dallas and New York. The exact mix of these two types of wholesale borrowings at any given time is dependent upon the market pricing of the individual borrowing sources.

Our wholesale borrowings increased by $3,441 million at June 30, 2003, compared with year-end 2002 predominantly due to an increase in federal funds purchased and repurchase agreements, which was partially offset by a decrease in advances from FHLBs. Other borrowings decreased by $564 million during the six months ended June 30, 2003 primarily as a result of a reduction in our senior debt. Refer to “Liquidity” for further discussion of funding sources at June 30, 2003, compared with year-end 2002.

Operating Segments

We manage our business along three major operating segments: Banking and Financial Services; Home Loans and Insurance Services; and Specialty Finance. Results for Corporate Support/Treasury and Other are also presented. Refer to Note 5 to the Consolidated Financial Statements—“Operating Segments” for information regarding the key elements of our management reporting methodologies used to measure segment performance.

Banking and Financial Services

	Three Months Ended June 30,						Percentage Change		Six Months Ended June 30,						Percentage Change
	2003			2002					2003			2002
	(dollars in millions)
Condensed income statement:
Net interest income	$	891		$	762		17	%	$	1,757		$	1,425		23	%
Provision for loan and lease losses		38			41		(7	)		75			75		–
Noninterest income		624			541		15			1,208			1,054		15
Noninterest expense		949			880		8			1,868			1,689		11
Income taxes		201			145		39			389			271		44
Net income	$	327		$	237		38		$	633		$	444		43
Performance and other data:
Efficiency ratio(1)		54.84	%		58.67	%	(7	)		55.08	%		59.29	%	(7	)
Average loans	$	25,570		$	20,627		24		$	24,602		$	19,954		23
Average assets		33,998			28,850		18			33,205			28,021		19
Average deposits		125,025			111,425		12			124,716			107,820		16

⁽¹⁾ The efficiency ratio is defined as noninterest expense, excluding a cost of capital charge on goodwill, divided by total revenue (net interest income and noninterest income).

35

Net income was $327 million and $633 million for the three and six months ended June 30, 2003, compared with $237 million and $444 million for the same periods in 2002. Net interest income increased to $891 million and $1,757 million for the three and six months ended June 30, 2003, compared with $762 million and $1,425 million for the same periods in 2002. The primary sources of net interest income are a funds transfer credit for deposits and interest income on home equity loans and lines of credit, commercial and consumer loans. These increases in net interest income for the three and six months ended June 30, 2003 were primarily due to a decrease in interest expense on money market deposit accounts and time deposit accounts resulting from declining interest rates and balances.

Noninterest income was $624 million and $1,208 million for the three and six months ended June 30, 2003, compared with $541 million and $1,054 million for the same periods in 2002. These increases were primarily due to higher depositor and other retail banking fees and an increase in home loan origination broker fees received from the Home Loans and Insurance Services Group, which totaled $47 million and $97 million for the three and six months ended June 30, 2003, compared with $17 million and $40 million for the same periods in 2002.

Noninterest expense increased to $949 million and $1,868 million for the three and six months ended June 30, 2003, compared with $880 million and $1,689 million for the same periods in 2002. These increases were predominantly due to increased allocated technology expense, compensation and benefits expense, and occupancy and equipment expense.

Total average assets increased to $33,998 million and $33,205 million for the three and six months ended June 30, 2003, compared with $28,850 million and $28,021 million for the same periods in 2002. The increase in average assets for the six months ended June 30, 2003 was substantially a result of a 48% increase in home equity loans and lines of credit average balances to $18,227 million from $12,334 million, partly offset by a decrease in consumer loans.

Total average deposits increased to $125,025 million and $124,716 million for the three and six months ended June 30, 2003, compared with $111,425 million and $107,820 million for the same periods in 2002. These increases in average deposits were predominantly due to higher levels of Platinum balances, partly offset by decreasing balances for money market deposit accounts and time deposit accounts. Average Platinum balances increased approximately 80% to $54.94 billion for the three months ended June 30, 2003 from $30.49 billion for the same period in 2002.

Home Loans and Insurance Services

	Three Months Ended June 30,						Percentage Change		Six Months Ended June 30,						Percentage Change
	2003			2002					2003			2002
	(dollars in millions)
Condensed income statement:
Net interest income	$	1,155		$	750		54	%	$	2,245		$	1,597		41	%
Provision for loan and lease losses		46			45		2			85			91		(7	)
Noninterest income		1,002			600		67			1,880			993		89
Noninterest expense		903			668		35			1,676			1,225		37
Income taxes		450			242		86			881			488		81
Net income	$	758		$	395		92		$	1,483		$	786		89
Performance and other data:
Efficiency ratio(1)		38.59	%		44.36	%	(13	)		37.20	%		42.27	%	(12	)
Average loans	$	141,997		$	118,996		19		$	139,411		$	122,110		14
Average assets		176,709			138,427		28			174,496			141,451		23
Average deposits		30,257			11,073		173			27,757			10,854		156

⁽¹⁾ The efficiency ratio is defined as noninterest expense, excluding a cost of capital charge on goodwill, divided by total revenue (net interest income and noninterest income).

36

Net income was $758 million and $1,483 million for the three and six months ended June 30, 2003, compared with $395 million and $786 million for the same periods in 2002. Net interest income increased to $1,155 million and $2,245 million for the three and six months ended June 30, 2003, compared with $750 million and $1,597 million for the same periods in 2002. These increases in net interest income were largely due to increases in interest income resulting from higher loans held for sale average balances and decreases in funding costs due to lower interest rates. Partially offsetting these increases were decreases in interest income on loans held in portfolio, primarily adjustable-rate loans, which continue to reprice downward from higher interest rate levels in 2002.

Noninterest income increased to $1,002 million and $1,880 million during the three and six months ended June 30, 2003, compared with $600 million and $993 million for the same periods in 2002. These increases were primarily due to higher gain from mortgage loans and GNMA pool buy-out income, partly offset by MSR impairment and higher amortization for the three and six months ended June 30, 2003.

Noninterest expense increased to $903 million and $1,676 million for the three and six months ended June 30, 2003 from $668 million and $1,225 million for the same periods in 2002. These increases were primarily due to higher allocated technology expense resulting from various ongoing projects, compensation and benefits expense, and foreclosed assets expense.

Total average assets increased to $176,709 million and $174,496 million for the three and six months ended June 30, 2003, compared with $138,427 million and $141,451 million for the same periods in 2002. These increases were primarily due to growth in average loans held for sale balances resulting from higher home loan volume of $108.16 billion for the quarter compared with $50.17 billion for the same period in 2002.

Total average deposits increased to $30,257 million and $27,757 million for the three and six months ended June 30, 2003, compared with $11,073 million and $10,854 million for the same periods in 2002. These increases were predominantly due to the growth of custodial and escrow balances resulting from higher loan prepayments.

Specialty Finance

	Three Months Ended June 30,						Percentage Change		Six Months Ended June 30,						Percentage Change
	2003			2002					2003			2002
	(dollars in millions)
Condensed income statement:
Net interest income	$	344		$	297		16	%	$	683		$	614		11	%
Provision for loan and lease losses		52			61		(15	)		103			128		(20	)
Noninterest income		20			19		5			28			43		(35	)
Noninterest expense		114			96		19			219			195		12
Income taxes		74			60		23			146			126		16
Net income	$	124		$	99		25		$	243		$	208		17
Performance and other data:
Efficiency ratio(1)		25.00	%		23.00	%	9			24.39	%		23.11	%	6
Average loans	$	30,933		$	29,722		4		$	30,768		$	30,169		2
Average assets		34,814			31,784		10			34,437			32,200		7
Average deposits		3,393			2,701		26			3,198			2,700		18

⁽¹⁾ The efficiency ratio is defined as noninterest expense, excluding a cost of capital charge on goodwill, divided by total revenue (net interest income and noninterest income).

37

Net income for the three and six months ended June 30, 2003 was $124 million and $243 million, compared with $99 million and $208 million for the same periods in 2002. Net interest income was $344 million and $683 million for the three and six months ended June 30, 2003, compared with $297 million and $614 million for the same periods in 2002. These increases in net interest income were substantially due to increased interest income on available-for-sale mortgage-backed securities resulting from higher levels of securitized multi-family loans and lower funding costs resulting from reduced interest rates. These increases were partially offset by reduced interest income from multi-family loans held in portfolio as a result of the lower interest rate environment.

Noninterest income was $20 million and $28 million for the three and six months ended June 30, 2003, compared with $19 million and $43 million for the same periods in 2002. The decrease for the six months ended June 30, 2003 was substantially due to a write-down in the valuation of an equity investment and a revaluation loss from derivatives during the first quarter of 2003.

Noninterest expense was $114 million and $219 million for the three and six months ended June 30, 2003, compared with $96 million and $195 million for the same periods in 2002. These increases were primarily due to increased compensation and benefits expense as a result of higher multi-family loan volumes and an increase in foreclosed assets expense.

Total average assets increased to $34,814 million and $34,437 million for the three and six months ended June 30, 2003, compared with $31,784 million and $32,200 million for the same periods in 2002. A significant portion of these increases were driven by higher multi-family loans and an increase in the available-for-sale mortgage-backed securities portfolio.

Corporate Support/Treasury and Other

	Three Months Ended June 30,					Percentage Change		Six Months Ended June 30,						Percentage Change
	2003			2002				2003			2002
	(dollars in millions)
Condensed income statement:
Net interest income (expense)	$	(365	)	$	291	–		$	(643	)	$	860		–
Provision for loan and lease losses		8			8	–			14			16		(13	)%
Noninterest income (expense)		(17	)		48	–			(81	)		(74	)	(9	)
Noninterest expense		164			150	9	%		285			391		(27	)
Income taxes (benefit)		(215	)		51	–			(399	)		102		–
Net income (loss)	$	(339	)	$	130	–		$	(624	)	$	277		–
Performance and other data:
Average loans	$	99		$	13	662		$	88		$	56		57
Average assets		38,980			68,267	(43	)		40,724			74,359		(45	)
Average deposits		5,005			5,449	(8	)		5,138			5,895		(13	)

Corporate Support/Treasury and Other had a net loss of $339 million and $624 million for the three and six months ended June 30, 2003, compared with net income of $130 million and $277 million for the same periods in 2002. Net interest expense was $365 million and $643 million for the three and six months ended June 30, 2003, compared with net interest income of $291 million and $860 million for the same periods in 2002. These decreases in net interest income were predominantly due to a decrease in average investment securities balances resulting from a change in our MSR hedging strategy toward an increase in the use of derivatives and the negative impact of the funds transfer pricing process due to higher average deposit balances within the operating segments. These decreases were partially offset by a reduction in interest expense from borrowed funds, as a result of lower rates and higher average deposit balances, which reduced the need for these borrowings.

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Noninterest expense was $164 million and $285 million for the three and six months ended June 30, 2003, compared with $150 million and $391 million for the same periods in 2002. The decrease for the six months ended June 30, 2003 was predominantly due to an increase in the technology expenses allocated to the operating segments.

Off-Balance Sheet Activities

Asset Securitization

We transform loans into securities, which are sold to investors—a process known as securitization. Securitization involves the sale of loans to a qualifying special-purpose entity (“QSPE”), typically a trust. The QSPEs, in turn, issue interest-bearing securities, commonly called asset-backed securities, that are secured by future collections on the sold loans. The QSPE sells securities to investors, which entitle the investors to receive specified cash flows during the term of the security. The QSPE uses proceeds from the sale of these securities to pay the Company for the loans sold to the QSPE. These entities are not consolidated within our financial statements since they satisfy the criteria established by Statement No. 140,Accounting for the Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. In general, these criteria require the QSPE to be legally isolated from the transferor (the Company), be limited to permitted activities, and have defined limits on the assets it can hold and the permitted sales, exchanges or distributions of its assets.

When we sell or securitize loans, we generally retain the right to service the loans and may retain senior, subordinated, residual, and other interests, all of which are considered retained interests in the securitized assets. Retained interests may provide credit enhancement to the investors and generally represent the Company’s maximum risk exposure associated with these transactions. Retained interests in the form of mortgage-backed securities were $9.20 billion at June 30, 2003, of which $9.01 billion have either a AAA credit rating or are agency insured. Additional information concerning securitization transactions is included in Note 5 to the Consolidated Financial Statements—“Mortgage Banking Activities” of the Company’s 2002 Annual Report on Form 10-K.

Guarantees

The Company may incur liabilities under certain contractual agreements contingent upon the occurrence of certain events. A discussion of these contractual arrangements under which the Company may be held liable is included in Note 4—“Guarantees” to the Consolidated Financial Statements.

Asset Quality

Nonaccrual Loans, Foreclosed Assets and Restructured Loans

Loans are generally placed on nonaccrual status when they are 90 days or more past due or when the timely collection of the principal of the loan, in whole or in part, is not expected. Management’s classification of a loan as nonaccrual or restructured does not necessarily indicate that the principal of the loan is uncollectible in whole or in part.

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Nonaccrual loans and foreclosed assets (“nonperforming assets”) and restructured loans consisted of the following:

	June 30, 2003			March 31, 2003			December 31, 2002
	(dollars in millions)
Nonperforming assets and restructured loans:
Nonaccrual loans:
Home loans	$	804		$	954		$	1,068
Purchased specialty mortgage finance		483			479			438
Total home loan nonaccrual loans		1,287			1,433			1,506
Home construction loans:
Builder(1)		31			38			42
Custom(2)		9			9			7
Home equity loans and lines of credit:
Banking subsidiaries		49			44			36
Washington Mutual Finance		41			41			37
Multi-family		54			49			50
Other real estate		369			402			413
Total nonaccrual loans secured by real estate		1,840			2,016			2,091
Consumer:
Banking subsidiaries		13			10			18
Washington Mutual Finance		64			67			69
Commercial business		79			73			79
Total nonaccrual loans held in portfolio		1,996			2,166			2,257
Foreclosed assets		317			334			336
Total nonperforming assets	$	2,313		$	2,500		$	2,593
As a percentage of total assets		0.82	%		0.90	%		0.97	%
Restructured loans	$	89		$	99		$	98
Total nonperforming assets and restructured loans	$	2,402		$	2,599		$	2,691

⁽¹⁾ Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale.

⁽²⁾ Represents construction loans made directly to the intended occupant of a single-family residence.

Nonaccrual loans totaled $1,996 million at June 30, 2003, compared with $2,166 million at March 31, 2003 and $2,257 million at December 31, 2002. During the first six months of 2003, declines in home loans and other real estate nonaccruals were partially offset by increases in purchased specialty mortgage finance and home equity loans and lines of credit nonaccruals.

Nonaccrual loans held for sale, which are excluded from the nonaccrual balances presented above, were $73 million, $72 million and $119 million at June 30, 2003, March 31, 2003 and December 31, 2002. Valuation changes on loans held for sale are reflected as gains or losses within gain from mortgage loans in noninterest income.

Home loan nonaccruals were $804 million at June 30, 2003, down $264 million from December 31, 2002. The decline in nonaccrual home loans was achieved through sales of nonperforming home loans.

During the first quarter of 2003, the Company sold a package of loans held in portfolio that totaled $131 million. Of this amount, $104 million were nonperforming loans and resulted in the Company incurring

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$8 million in charge-offs. In the second quarter of 2003, the Company completed a sale of loans held in portfolio totaling $195 million, of which $161 million were nonperforming loans that resulted in a charge-off of $4 million. The Company will periodically evaluate nonperforming loan sales as part of its ongoing portfolio management strategy.

Purchased specialty mortgage finance nonaccrual loans totaled $483 million at June 30, 2003 relatively unchanged during the second quarter, but up $45 million from December 31, 2002 primarily reflecting growth and seasoning of this loan portfolio.

Nonaccrual home equity loans and lines of credit totaled $90 million at quarter end, an increase of $5 million during the quarter and $17 million from December 31, 2002. However, the percentage of nonaccruals to total loans in this portfolio totaled 0.40% at June 30, 2003, unchanged from December 31, 2002.

At quarter end, other real estate loans on nonaccrual totaled $369 million, down from $402 million last quarter and $413 million at December 31, 2002. Much of the year-to-date improvement was due to principal charge-offs totaling $13 million and reinstatements to performing status and principal paydowns within the Company’s franchise-oriented finance business.

The multi-family portfolio continues to exhibit strong performance, with nonaccrual loans in this category representing 0.28% of total multi-family loans at June 30, 2003, unchanged from year-end 2002.

At June 30, 2003, foreclosed assets were $317 million, compared with $334 million at March 31, 2003 and $336 million at December 31, 2002. The Company’s foreclosed assets include home and commercial real estate as well as a small amount of personal property.

90 or More Days Past Due

The amount of loans held in portfolio which were 90 or more days contractually past due and still accruing interest was $47 million at June 30, 2003, compared with $93 million at March 31, 2003 and $60 million at December 31, 2002. The majority of these loans are either VA- or FHA-insured with little or no risk of loss of principal or interest.

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Provision and Allowance for Loan and Lease Losses

Changes in the allowance for loan and lease losses were as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
	2003			2002			2003			2002
	(dollars in millions)
Balance, beginning of period	$	1,680		$	1,621		$	1,653		$	1,404
Allowance acquired through business combinations		–			–			–			148
Allowance for transfer to loans held for sale		–			–			(3	)		(7	)
Provision for loan and lease losses		118			160			243			335
		1,798			1,781			1,893			1,880
Loans charged off:
Loans secured by real estate:
Home loans		(9	)		(11	)		(25	)		(22	)
Purchased specialty mortgage finance		(9	)		(8	)		(19	)		(17	)
Total home loan charge-offs		(18	)		(19	)		(44	)		(39	)
Home equity loans and lines of credit:
Banking subsidiaries		(4	)		(1	)		(7	)		(2	)
Washington Mutual Finance		(1	)		(3	)		(4	)		(5	)
Other real estate		(21	)		(32	)		(30	)		(42	)
Total loans secured by real estate		(44	)		(55	)		(85	)		(88	)
Consumer:
Banking subsidiaries		(18	)		(20	)		(35	)		(40	)
Washington Mutual Finance		(42	)		(44	)		(83	)		(84	)
Commercial business		(31	)		(19	)		(45	)		(38	)
Total loans charged off		(135	)		(138	)		(248	)		(250	)
Recoveries of loans previously charged off:
Loans secured by real estate:
Home loans		2			–			2			–
Purchased specialty mortgage finance		1			–			1			–
Other real estate		2			1			5			2
Total loans secured by real estate		5			1			8			2
Consumer:
Banking subsidiaries		3			3			6			5
Washington Mutual Finance		6			5			12			10
Commercial business		3			13			9			18
Total recoveries of loans previously charged off		17			22			35			35
Net charge-offs		(118	)		(116	)		(213	)		(215	)
Balance, end of period	$	1,680		$	1,665		$	1,680		$	1,665
Net charge-offs (annualized) as a percentage of average loans held in portfolio		0.31	%		0.32	%		0.28	%		0.29	%
Allowance as a percentage of total loans held in portfolio		1.09			1.14			1.09			1.14

From the fourth quarter of 2001 through the third quarter of 2002, the Company provided for amounts significantly in excess of charge-offs reflecting risks associated with growth in nonaccrual loans and economic uncertainty. As the economy stabilizes and nonperforming loan levels continue to decrease, the Company is adjusting the provision to amounts approaching actual charge-offs. The Company believes its portfolio is adequately reserved, and accordingly, decreased its second quarter 2003 provision to $118 million compared

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with $160 million during the same period in 2002. As a percentage of average loans, net charge offs were 0.31% and 0.28% for the three and six months ended June 30, 2003, compared with 0.32% and 0.29% for the same periods in 2002.

Net charge-offs for the three and six months ended June 30, 2003 were $118 million and $213 million compared with $116 million and $215 million for the same periods in 2002. While representing less than 2% of the Company’s assets, Washington Mutual Finance accounted for 35% of total net charge-offs during the first half of 2003. This higher level of charge-offs in a consumer finance operation such as Washington Mutual Finance is expected due to the higher risk profile of the customer base as reflected in the interest rates charged for these loans.

The allowance for loan and lease losses represents management’s estimate of credit losses inherent in the Company’s loan and lease portfolios as of the balance sheet date. The estimation of the allowance is based on a variety of factors, including past loan loss experience, adverse situations that have occurred but are not yet known that may affect the borrower’s ability to repay, the estimated value of underlying collateral and general economic conditions. The Company’s methodology for assessing the adequacy of the allowance includes the evaluation of three distinct elements: the formula allowance, the specific allowance (which includes the allowance for loans deemed to be impaired by Statement No. 114,Accounting by Creditors for Impairment of a Loan) and the unallocated allowance. The formula allowance and the specific allowance collectively represent the portion of the allowance for loan and lease losses that are allocated to the various loan portfolios.

Refer to Note 1 to the Consolidated Financial Statements—“Summary of Significant Accounting Policies” in our 2002 Annual Report on Form 10-K for further discussion of the Allowance for Loan and Lease Losses.

Liquidity

The objective of liquidity management is to ensure the Company has the continuing ability to maintain cash flows that are adequate to fund operations and meet obligations and other commitments on a timely and cost-effective basis. The Company establishes liquidity guidelines for its principal operating subsidiaries as well as for the parent holding company, Washington Mutual, Inc. The principal sources of liquidity for our banking subsidiaries are customer deposits, wholesale borrowings, the maturity and repayment of portfolio loans, securities held in our available-for-sale portfolio and mortgage loans designated as held for sale. Among these sources, transaction deposits and wholesale borrowings from FHLB advances and repurchase agreements continue to provide the Company with a significant source of stable funding. During the six months ended June 30, 2003, those sources funded 72% of average total assets. Our continuing ability to retain our transaction-deposit customer base and to attract new deposits depends on various factors, such as customer service satisfaction levels and the competitiveness of interest rates offered on our deposit products. The Company would primarily use wholesale borrowings to offset any potential declines in deposit balances. We expect that FHLB advances and repurchase agreements will continue to be our most significant sources of wholesale borrowings during 2003, and we expect to have the necessary assets available to pledge as collateral to obtain these funds.

In the six months ended June 30, 2003, the Company’s proceeds from the sales of loans held for sale were approximately $168.93 billion. These proceeds were, in turn, used as the primary funding source for the origination and purchases of approximately $177.30 billion of loans held for sale during the same period. As this cyclical pattern of sales and originations/purchases repeats itself during the course of a period, the amount of funding necessary to sustain our mortgage banking operations does not significantly affect the Company’s overall level of liquidity resources.

To supplement our funding sources, our banking subsidiaries also raise funds in domestic and international capital markets. Effective August 7, 2003, the Company established a new $20 billion Global Bank Note Program for Washington Mutual Bank, FA (“WMBFA”) and Washington Mutual Bank (“WMB”) to issue senior and subordinated notes in the United States and in international capital markets in a variety of currencies and

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structures. This program replaced the $15 billion program established in April, 2001. Under this program, WMBFA will be allowed to issue up to $15 billion in notes of which $5 billion can be issued as subordinated notes. WMB will be allowed to issue up to $5 billion in senior notes. The maximum aggregate principal amount of notes with maturities greater than 270 days from the date of issue offered by WMBFA may not exceed $7.5 billion.

Liquidity for Washington Mutual, Inc. is generated through its ability to raise funds in various capital markets and through dividends from subsidiaries, commercial paper programs and lines of credit.

Washington Mutual, Inc.’s primary funding source during the first six months of 2003 was from dividends paid by our banking subsidiaries. Although we expect Washington Mutual, Inc. to continue to receive banking subsidiary dividends during 2003, including the amount necessary to support the ten cent per share dividend increase approved by the Company’s Board of Directors in July 2003, various regulatory requirements related to capital adequacy and retained earnings limit the amount of dividends that can be paid by our banking subsidiaries. For more information on dividend restrictions applicable to our banking subsidiaries, refer to the Company’s 2002 Annual Report on Form 10-K, “Business—Regulation and Supervision” and Note 18 to the Consolidated Financial Statements—“Regulatory Capital Requirements and Dividend Restrictions.”

In February 2003, Washington Mutual, Inc. filed a shelf registration statement with the Securities and Exchange Commission to register $2 billion of debt securities, preferred stock and depository shares in the United States and in international capital markets and in a variety of currencies and structures. The shelf registration statement was declared effective on April 15, 2003. At June 30, 2003, Washington Mutual, Inc. had $2 billion available under this shelf registration.

Washington Mutual, Inc. and its subsidiaries also have various other credit facilities and agreements that are sources of liquidity. Washington Mutual, Inc. and Washington Mutual Finance have a revolving credit facility totaling $800 million which provides back-up for the commercial paper programs of Washington Mutual, Inc. and Washington Mutual Finance as well as funds for general corporate purposes. At June 30, 2003, there was $348 million borrowed under this credit facility. Washington Mutual Finance has agreements to participate in a $600 million asset-backed commercial paper conduit program. At June 30, 2003, Washington Mutual Finance had asset-backed commercial paper of $600 million outstanding. Long Beach Mortgage has revolving credit facilities totaling $2.0 billion that are used to fund loans held for sale. At June 30, 2003, Long Beach Mortgage had borrowed $1.40 billion under these credit facilities.

Capital Adequacy

Reflecting the increases in loans held for sale and loans held in portfolio during the six months ended June 30, 2003, the ratio of stockholders’ equity to total assets decreased to 7.44% at June 30, 2003 from 7.50% at December 31, 2002.

The regulatory capital ratios of WMBFA, WMB and Washington Mutual Bank fsb (“WMBfsb”) and the minimum regulatory ratios to be categorized as well-capitalized were as follows:

	June 30, 2003						Well-Capitalized Minimum
	WMBFA		WMB		WMBfsb
Tier 1 capital to adjusted total assets (leverage)	5.81	%	5.96	%	9.08	%	5.00	%
Adjusted tier 1 capital to total risk-weighted assets	9.42		9.36		15.34		6.00
Total risk-based capital to total risk-weighted assets	11.55		11.59		16.59		10.00

Our federal savings bank subsidiaries, WMBFA and WMBfsb, are also required by Office of Thrift Supervision regulations to maintain tangible capital of at least 1.50% of assets. WMBFA and WMBfsb both satisfied this requirement at June 30, 2003.

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Our broker-dealer subsidiaries are also subject to capital requirements. At June 30, 2003, both of our broker-dealer subsidiaries were in compliance with their applicable capital requirements.

During the three and six months ended June 30, 2003, the Company repurchased 15.3 million and 25.5 million shares of our common stock at an average price of $40.52 and $38.08 per share as part of our share repurchase program. Effective July 15, 2003, the Company adopted a new share purchase program approved by the Board of Directors. Under the new program, the Company is authorized to repurchase up to 100 million shares of its common stock, as conditions warrant. This Program replaces the Company’s previous share repurchase program. From July 1, 2003 through July 31, 2003, the Company repurchased an additional 2.2 million shares. Management may engage in future share repurchases as liquidity conditions permit and market conditions warrant.

Market Risk Management

Market risk is defined as the sensitivity of income, fair market values and capital to changes in interest rates, foreign currency exchange rates, commodity prices and other relevant market rates or prices. The primary market risk to which we are exposed is interest rate risk. Substantially all of our interest rate risk arises from instruments, positions and transactions entered into for purposes other than trading. They include loans, MSR, securities, deposits, borrowings, long-term debt and derivative financial instruments.

We are exposed to different types of interest rate risks, including lag, repricing, basis, prepayment and lifetime cap risk. These risks are described in further detail within the “Market Risk Management” section of Management’s Discussion and Analysis in our 2002 Annual Report on Form 10-K. We manage interest rate risk within an overall asset/liability management framework. The principal objective of our asset/liability management is to manage the sensitivity of net income to changing interest rates. Asset/liability management is governed by a policy reviewed and approved annually by our Board. The Board has delegated the oversight of the administration of this policy to the Finance Committee of the Board of Directors.

Management of Interest Rate Risk

We manage our balance sheet to mitigate the impact of changes in market interest rates on net income and changes in the fair value of MSR. Key components of our balance sheet strategy include the origination and retention of short-term and adjustable-rate assets, the origination and sale of most fixed-rate and certain hybrid adjustable-rate mortgage loans, the management of MSR and the management of our deposit and borrowing portfolios. We may also modify our interest rate risk profile with interest rate contracts, including embedded derivatives and forward commitments.

Overall, we believe our risk management program will minimize net income sensitivity under most interest rate environments. However, the success of this program is dependent on the judgments we make regarding the direction and timing of changes in interest rates and the amount and mix of risk management instruments that we believe are appropriate to manage our interest rate risk. Our net income could be adversely affected if we are unable to effectively implement, execute or manage this strategy.

Asset/Liability Risk Management

The interest rate contracts that are classified as asset/liability risk management instruments are intended to assist in the management of our net interest income. These contracts are often used to modify the repricing period of our interest-bearing funding with the intention of reducing the volatility of changes in net interest income. The types of contracts used for this purpose consist of interest rate swaps, interest rate corridors and certain derivatives that are embedded in borrowings. The aggregate notional amount of these contracts totaled $38.01 billion at June 30, 2003.

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The pay-fixed swaps, interest rate corridors and embedded payor swaptions are intended to assist in reducing the sensitivity of the net interest margin to changes in interest rates. The embedded payor swaptions are exercisable upon maturity, which ranges from July 2003 to February 2004. None of the interest rate corridors had strike rates that were in the money at June 30, 2003. We also use receive-fixed swaps as part of our asset/liability risk management strategy to help us modify the repricing characteristics of certain long-term liabilities to match those of our assets. Typically, these are swaps of long-term fixed-rate debt to a short-term adjustable-rate which more closely resembles our asset repricing characteristics.

MSR Risk Management

As part of our overall approach to interest rate risk management, we manage potential impairment in the fair value of MSR and increased amortization levels of MSR by a comprehensive risk management program. Our intent is to offset the changes in fair value and higher amortization levels of MSR with changes in the fair value of risk management instruments. The risk management instruments include forward purchase commitments, interest rate contracts and available-for-sale securities. The goal is to offset decreases (increases) in the fair value of MSR with increases (decreases) in the fair value of the forward purchase commitments, interest rate contracts and available-for-sale securities.

The available-for-sale securities generally consist of fixed-rate debt securities, such as U.S. Government and agency bonds and mortgage-backed securities, including principal-only strips. The interest rate contracts typically consist of interest rate floors and interest rate swaps and swaptions. From time to time, we may choose to embed interest rate contracts into our borrowing instruments, such as repurchase agreements. The forward purchase commitments generally consist of agreements to purchase 15- and 30-year fixed-rate mortgage-backed securities.

As derivatives, the interest rate swaps, swaptions, stand alone interest rate floors and forward commitments receive mark-to-market accounting treatment. Changes in the fair value of instruments that manage MSR fair value changes are recorded as components of noninterest income.

We adjust the mix of instruments used to manage MSR fair value changes as interest rates and market conditions warrant. The intent is to maintain an efficient and fairly liquid mix as well as a diverse portfolio of risk management instruments with broad maturity ranges. We may elect to increase or decrease our concentration of specific instruments during certain times based on market conditions. We believe this approach will result in the most efficient strategy. However, our net income could be adversely affected if we are unable to effectively implement, execute or manage this strategy.

The mix of instruments is predicated, in part, on the requirement of lower of cost or market accounting treatment for MSR; i.e. each MSR stratum is recorded at its fair value unless the fair value exceeds the amortized cost. This could result in increases in the fair value of MSR that are not marked-to-market through earnings. Therefore, management may elect to decrease the emphasis on risk management instruments accorded mark-to-market accounting treatment in periods in which the fair value of MSR significantly exceeds its amortized cost.

We also manage the size and risk profile of the MSR asset. Depending on market conditions and our desire to expand customer relationships, we may periodically sell or purchase servicing rights. We also may structure loan sales to reduce the size of the MSR asset.

Other Mortgage Banking Risk Management

We also manage the risks associated with our mortgage warehouse and pipeline. The mortgage warehouse consists of fixed-rate and, to a lesser degree, adjustable-rate home loans to be sold in the secondary market. The pipeline consists of commitments to originate or purchase fixed-rate and, to a lesser degree, adjustable-rate home

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loans to be sold in the secondary market. The risk associated with the mortgage pipeline and warehouse is the potential change in interest rates between the time the customer locks in the rate on the loan and the time the loan is sold. This period is usually 60 to 120 days.

To manage the warehouse and pipeline risks, we execute forward sales commitments, mortgage option contracts and interest rate futures. A forward sales commitment protects us in a rising interest rate environment, since the sales price and delivery date are already established. A forward sales commitment is different, however, from an option contract in that we are obligated to deliver the loan to the third party on the agreed-upon future date. We also consider the fallout factor, which represents the percentage of loans that are not expected to close, when determining the appropriate amount of forward sales commitments.

June 30, 2003 and December 31, 2002 Sensitivity Comparison

To analyze net income sensitivity, we project net income over a twelve month horizon based on parallel shifts in the yield curve. Management employs other analyses and interest rate scenarios to evaluate interest rate risk. For example, we project net income and net interest income under a variety of interest rate scenarios, including immediate parallel shifts in the yield curve, non-parallel shifts in the yield curve and more extreme non-parallel rising and falling interest rate environments. These additional scenarios also address the risk exposure over longer periods of time. They also capture the net income and net interest income sensitivity due to changes in the slope of the yield curve and changes in the spread between Treasury and LIBOR rates. The Company’s net income and net interest income sensitivity analysis methodologies are described in further detail within the “Market Risk Management” section of Management’s Discussion and Analysis in our 2002 Annual Report on Form 10-K.

The table below indicates the sensitivity of net income and net interest income to interest rate movements. The comparative scenarios assume a parallel shift in the yield curve with interest rates rising 200 basis points in even quarterly increments over the twelve month periods ending June 30, 2004 and December 31, 2003 and interest rates decreasing by 50 basis points in even quarterly increments over the first six months of the twelve month period.

	Gradual Change in Rates
	-50 basis points		+200 basis points
Net income change for the one-year period beginning:
July 1, 2003	2.20	%	4.23	%
January 1, 2003	5.11		3.90
Net interest income change for the one-year period beginning:
July 1, 2003	0.52		(3.75	)
January 1, 2003	2.11		(5.71	)

The projected increase in net income in the -50 basis point scenario in the July 1st analysis was less than in the January 1st analysis due to a reduction in the anticipated increase in net interest income as well as a slightly less favorable change in the fair value of the MSR and the MSR risk management instruments. The change in net interest income was due to modest decreases in the expansion of the net interest margin and increased balance sheet shrinkage. The slight increase in net income in the +200 basis point environment was due to the reduced sensitivity of net interest income which was partially offset by further decreases in gain from mortgage loans. Net interest income improved from the levels in the January 1, 2003 analysis in the +200 basis point scenario mainly due to an increase in interest-earning assets in this environment. The projected growth in interest-earning assets was mainly due to the anticipated purchase of investment securities used to manage the fair value changes of the MSR after the fair value of the MSR begins to exceed its amortized cost and thus cannot be marked-to-market through earnings. The balance sheet was projected to decrease without these purchases of investment securities due to the expected decline in the extremely high levels of loans held for sale that are not expected to be entirely offset by increases in the loans held in portfolio balance.

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Maturity and Repricing Information

We use interest rate risk management contracts and available-for-sale securities as tools to manage our interest rate risk profile. The following tables summarize the key contractual terms associated with these contracts and available-for-sale securities. Interest rate risk management contracts that are embedded within certain adjustable- and fixed-rate borrowings, while not accounted for as derivatives under Statement No. 133, have been included in the tables since they also function as interest rate risk management tools. Substantially all of the pay-fixed swaps, receive-fixed swaps, payor swaptions, floors and embedded derivatives at June 30, 2003 are indexed to three-month LIBOR.

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The following estimated net fair value amounts have been determined by the Company using available market information and appropriate valuation methodologies:

	June 30, 2003
	Maturity Range
	Net Fair Value			Total Notional Amount			2003			2004			2005			2006			2007			After 2007
	(dollars in millions)
Interest Rate Risk Management Contracts:
Asset/Liability Risk Management
Pay-fixed swaps:	$	(1,186	)
Contractual maturity				$	22,937		$	1,507		$	8,834		$	3,195		$	4,708		$	3,700		$	993
Weighted average pay rate					4.23	%		3.25	%		4.03	%		4.08	%		4.39	%		5.02	%		4.30	%
Weighted average receive rate					1.26	%		1.23	%		1.26	%		1.25	%		1.30	%		1.27	%		1.10	%
Receive-fixed swaps:		662
Contractual maturity				$	5,640		$	600		$	200		$	530		$	1,000			–		$	3,310
Weighted average pay rate					1.16	%		0.87	%		1.53	%		0.65	%		1.29	%		–			1.24	%
Weighted average receive rate					5.79	%		5.10	%		6.75	%		5.37	%		6.81	%		–			5.61	%
Interest rate corridors:		–
Contractual maturity				$	344		$	90		$	191		$	63			–			–			–
Weighted average strike rate—long cap					7.86	%		8.63	%		8.14	%		5.94	%		–			–			–
Weighted average strike rate—short cap					9.12	%		9.50	%		9.48	%		7.44	%		–			–			–
Embedded pay-fixed swaps:		(169	)
Contractual maturity				$	2,750		$	750			–			–			–		$	2,000			–
Weighted average pay rate					4.10	%		2.93	%		–			–			–			4.54	%		–
Weighted average receive rate					1.29	%		1.31	%		–			–			–			1.28	%		–
Embedded caps:		–
Contractual maturity				$	534		$	34		$	500			–			–			–			–
Weighted average strike rate					7.72	%		7.25	%		7.75	%		–			–			–			–
Embedded payor swaptions(1):		–
Contractual maturity (option)				$	5,800		$	5,300		$	500			–			–			–			–
Weighted average strike rate					6.10	%		6.09	%		6.21	%		–			–			–			–
Contractual maturity (swap)					–			–			–			–		$	3,750			–		$	2,050
Weighted average pay rate					–			–			–			–			5.99	%		–			6.31	%
Total asset/liability risk management		(693	)	$	38,005
Other Mortgage Banking Risk Management
Forward purchase commitments:		(44	)
Contractual maturity				$	15,662		$	15,662			–			–			–			–			–
Weighted average price					101.95			101.95
Forward sales commitments:		(65	)
Contractual maturity				$	74,252		$	74,252			–			–			–			–			–
Weighted average price					101.54			101.54
Interest rate futures:		–
Contractual maturity				$	81		$	30		$	30		$	14		$	6		$	1			–
Weighted average price					98.31			98.90			98.54			97.46			96.58			96.02			–
Mortgage put options:		29
Contractual maturity				$	9,120		$	9,120			–			–			–			–			–
Weighted average strike price					100.90			100.90
Total other mortgage banking risk management	$	(80	)	$	99,115

⁽¹⁾ Interest rate swaptions are only exercisable upon maturity.

(This table is continued on the next page.)

49

(Continued from the previous page.)

	June 30, 2003
	Maturity Range
	Net Fair Value			Total Notional Amount			2003		2004			2005			2006			2007	After 2007
	(dollars in millions)
Interest Rate Risk Management Contracts:
MSR Risk Management
Pay-fixed swaps:	$	(62	)
Contractual maturity				$	2,395			–		–			–			–		–	$	2,395
Weighted average pay rate					4.31	%		–		–			–			–		–		4.31	%
Weighted average receive rate					1.58	%		–		–			–			–		–		1.58	%
Receive-fixed swaps:		274
Contractual maturity				$	8,152			–	$	243			–		$	200		–	$	7,709
Weighted average pay rate					1.13	%		–		1.33	%		–			1.00	%	–		1.12	%
Weighted average receive rate					4.27	%		–		5.34	%		–			5.20	%	–		4.22	%
Constant maturity mortgage swaps:		–
Contractual maturity				$	100			–		–			–			–		–	$	100
Weighted average pay rate					4.35	%		–		–			–			–		–		4.35	%
Weighted average receive rate					4.20	%		–		–			–			–		–		4.20	%
Floors(2):		201
Contractual maturity				$	4,600			–		–			–			–		–	$	4,600
Weighted average strike rate					3.18	%		–		–			–			–		–		3.18	%
Payor swaptions:		94
Contractual maturity (option)				$	4,600			–	$	1,700		$	2,900			–		–		–
Weighted average strike rate					5.39	%		–		5.14	%		5.53	%		–		–		–
Contractual maturity (swap)					–			–		–			–			–		–	$	4,600
Weighted average pay rate					–			–		–			–			–		–		5.39	%
Total interest rate contracts		507		$	19,847
Forward purchase commitments:		47
Contractual maturity				$	12,225		$	12,225		–			–			–		–		–
Weighted average price					100.18			100.18
Total MSR risk management	$	554		$	32,072
Total interest rate risk management contracts	$	(219	)	$	169,192

⁽²⁾ At June 30, 2003, none of these floors were effective. These contracts will become effective during January 2004.

	June 30, 2003
	Amortized Cost		Net Unrealized Gain/Loss			Fair Value
	(dollars in millions)
Available-For-Sale Securities:
MSR Risk Management
Mortgage-backed securities(1):
U.S. Government and agency	$	174	$	(8	)	$	166
Investment securities(1):
U.S. Government and agency		10,455		406			10,861
Total MSR risk management	$	10,629	$	398		$	11,027

⁽¹⁾ Mortgage-backed securities and investment securities mature after 2007.

50

	December 31, 2002
	Maturity Range
	Net Fair Value			Total Notional Amount			2003				2004			2005			2006			2007			After 2007
	(dollars in millions)
Interest Rate Risk Management Contracts:
Asset/Liability Risk Management
Pay-fixed swaps:	$	(1,143	)
Contractual maturity				$	29,742		$	8,416			$	8,834		$	3,210		$	4,709		$	3,700		$	873
Weighted average pay rate					3.92	%		2.92	%			4.03	%		4.09	%		4.39	%		5.02	%		4.68	%
Weighted average receive rate					1.56	%		1.56	%			1.53	%		1.57	%		1.58	%		1.66	%		1.37	%
Receive-fixed swaps:		591
Contractual maturity				$	5,905		$	825			$	200		$	530		$	1,000			–		$	3,350
Weighted average pay rate					1.39	%		1.21	%	��		1.65	%		0.90	%		1.40	%		–			1.49	%
Weighted average receive rate					5.81	%		5.40	%			6.75	%		5.37	%		6.81	%		–			5.62	%
Interest rate caps:		–
Contractual maturity				$	181		$	181				–			–			–			–			–
Weighted average strike rate					7.13	%		7.13	%			–			–			–			–			–
Interest rate corridors:		–
Contractual maturity				$	345		$	90			$	191		$	64			–			–			–
Weighted average strike rate—long cap					7.86	%		8.63	%			8.14	%		5.94	%		–			–			–
Weighted average strike rate—short cap					9.11	%		9.50	%			9.48	%		7.44	%		–			–			–
Payor swaptions(1):		–
Contractual maturity (option)				$	5,000		$	5,000				–			–			–			–			–
Weighted average strike rate					6.12	%		6.12	%			–			–			–			–			–
Contractual maturity (swap)					–			–				–			–		$	1,000		$	750		$	3,250
Weighted average pay rate					–			–				–			–			6.05	%		6.26	%		6.11	%
Embedded pay-fixed swaps:		(207	)
Contractual maturity				$	2,750			–				–			–			–		$	2,750			–
Weighted average pay rate					4.73	%		–				–			–			–			4.73	%		–
Weighted average receive rate					1.74	%		–				–			–			–			1.74	%		–
Embedded caps:		–
Contractual maturity				$	641		$	141			$	500			–			–			–			–
Weighted average strike rate					7.64	%		7.25	%			7.75	%		–			–			–			–
Embedded payor swaptions(1):		4
Contractual maturity (option)				$	6,400		$	5,900			$	500			–			–			–			–
Weighted average strike rate					6.14	%		6.13	%			6.21	%		–			–			–			–
Contractual maturity (swap)					–			–				–			–		$	3,750			–		$	2,650
Weighted average pay rate					–			–				–			–			5.99	%		–			6.34	%
Total asset/liability risk management		(755	)	$	50,964
Other Mortgage Banking Risk Management
Forward purchase commitments:		101
Contractual maturity				$	10,193		$	10,193				–			–			–			–			–
Weighted average price					102.38			102.38
Forward sales commitments:		(662	)
Contractual maturity				$	41,238		$	41,238				–			–			–			–			–
Weighted average price					102.34			102.34
Mortgage put options:		7
Contractual maturity				$	7,150		$	7,150				–			–			–			–			–
Weighted average strike price					99.28			99.28
Total other mortgage banking risk management	$	(554	)	$	58,581

⁽¹⁾ Interest rate swaptions are only exercisable upon maturity.

(This table is continued on the next page.)

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(Continued from the previous page.)

	December 31, 2002
	Maturity Range
	Net Fair Value			Total Notional Amount			2003			2004			2005			2006			2007			After 2007
	(dollars in millions)
Interest Rate Risk Management Contracts:
MSR Risk Management
Pay-fixed swaps:	$	(50	)
Contractual maturity				$	2,903			–			–			–			–		$	1,950		$	953
Weighted average pay rate					3.77	%		–			–			–			–			3.41	%		4.52	%
Weighted average receive rate					1.41	%		–			–			–			–			1.40	%		1.42	%
Receive-fixed swaps:		2,176
Contractual maturity				$	17,915			–		$	561		$	500		$	700		$	1,250		$	14,904
Weighted average pay rate					1.57	%		–			1.80	%		1.41	%		1.42	%		1.50	%		1.58	%
Weighted average receive rate					5.65	%		–			4.35	%		4.54	%		5.31	%		4.33	%		5.86	%
Floors(2):		249
Contractual maturity				$	3,900			–			–			–			–		$	3,900			–
Weighted average strike rate					6.09	%		–			–			–			–			6.09	%		–
Receiver swaptions:		415
Contractual maturity (option)				$	4,000		$	300		$	800		$	2,900			–			–			–
Weighted average strike rate					6.21	%		5.42	%		5.73	%		6.43	%		–			–			–
Contractual maturity (swap)					–			–			–			–			–			–		$	4,000
Weighted average receive rate					–			–			–			–			–			–			6.21	%
Total interest rate contracts		2,790		$	28,718
Forward purchase commitments:		236
Contractual maturity				$	13,250		$	13,250			–			–			–			–			–
Weighted average price					100.35			100.35
Total MSR risk management	$	3,026		$	41,968
Total interest rate risk management contracts	$	1,717		$	151,513

⁽²⁾ At December 31, 2002, none of these floors were effective. These contracts became effective during May and July 2003.

	December 31, 2002
	Amortized Cost		Net Unrealized Gain/Loss		Fair Value
	(dollars in millions)
Available-For-Sale Securities:
MSR Risk Management
Mortgage-backed securities(1):
U.S. Government and agency	$	583	$	20	$	603
Investment securities(1):
U.S. Government and agency		7,268		212		7,480
Total MSR risk management	$	7,851	$	232	$	8,083

⁽¹⁾ Mortgage-backed securities and investment securities mature after 2007.

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Derivative Counterparty Credit Risk

Derivative financial instruments expose the Company to credit risk in the event of nonperformance by counterparties to such agreements. This risk consists primarily of the termination value of agreements where the company is in a favorable position. Credit risk related to derivative financial instruments is considered and provided for separately from the allowance for loan and lease losses. The Company manages the credit risk associated with its various derivative agreements through counterparty credit review, counterparty exposure limits and monitoring procedures. Substantially all of the counterparty credit risk associated with derivative financial instruments is with counterparties rated A or better by Standard & Poor’s at June 30, 2003. The Company obtains collateral from the counterparties for amounts in excess of the exposure limits and monitors its exposure and collateral requirements on a daily basis. The fair value of collateral either received from or provided to a counterparty is continually monitored and the Company may request additional collateral from counterparties or return collateral pledged as deemed appropriate. The Company’s agreements generally include master netting agreements whereby the counterparties are entitled to settle their positions “net.” At June 30, 2003 and December 31, 2002, the Company’s credit risk related to derivative financial instruments, net of the effects of collateral and master netting agreements, was $422 million and $780 million.

Gap Report

A historical view of interest rate sensitivity for savings institutions is the gap report, which indicates the difference between assets maturing or repricing within a period and total liabilities maturing or repricing within the same period. In assigning assets to maturity and repricing categories, we consider expected prepayment speeds and amortization of principal in addition to the contractual maturities. The analysis excludes reinvestment of cash. Prepayment assumptions are based on internal projections based on an analysis of market prepayment estimates and past experience with our current loan and mortgage-backed securities portfolios. The majority of our transaction deposits are not contractually subject to repricing. Therefore, these instruments have been allocated based on expected decay rates and/or repricing intervals. Certain transaction deposits that reprice based on a market index or which typically have frequent repricing intervals are allocated to the repricing or maturity buckets based on the expected repricing period. Non-rate sensitive items such as the reserve for loan losses, mark-to-market adjustments, premiums and discounts and deferred loan fees/costs are not included in the table. Loans held for sale are included in the 0-3 months category, provided that these instruments are offset with forward commitments to sell loans. In addition, MSR risk management contracts are excluded from the analysis except for the pay-fixed swaps that were fair value hedges of specified fixed-rate investment securities.

53

The gap information is limited by the fact that it is a point-in-time analysis. The data reflects conditions and assumptions as of June 30, 2003. These conditions and assumptions may not be appropriate at another point in time. The analysis is also subject to the accuracy of various assumptions used, particularly the prepayment and decay rate projections, the expected repricing period of certain deposits and the allocation of instruments with optionality to a specific maturity category, especially interest rate contracts. Consequently, the interpretation of the gap information is subjective.

	June 30, 2003
	Projected Repricing
	0-3 months			4-12 months			1-5 years			Thereafter			Total
	(dollars in millions)
Interest-Sensitive Assets
Adjustable-rate loans(1)	$	81,804		$	25,410		$	25,721		$	175		$	133,110
Fixed-rate loans(1)		21,882			8,213			20,178			3,902			54,175
Adjustable-rate securities(1)(2)		23,845			160			44			–			24,049
Fixed-rate securities(1)		462			1,656			6,582			15,569			24,269
Cash and cash equivalents, federal funds sold and securities purchased under resale agreements		9,473			–			–			–			9,473
Derivatives matched against assets		3,085			–			(472	)		(2,613	)		–
	$	140,551		$	35,439		$	52,053		$	17,033		$	245,076
Interest-Sensitive Liabilities
Noninterest-bearing deposits(3)	$	2,007		$	7,379		$	22,921		$	14,198		$	46,505
Interest-bearing checking accounts, savings accounts and money market deposit accounts(3)		21,429			14,860			33,592			19,406			89,287
Interest-bearing time deposit accounts		8,894			10,926			9,623			1,219			30,662
Short-term and adjustable-rate borrowings		64,421			3,596			59			224			68,300
Long-term fixed-rate borrowings		3,056			1,433			8,661			5,730			18,880
Derivatives matched against liabilities		(18,003	)		3,210			16,985			(2,192	)		–
	$	81,804		$	41,404		$	91,841		$	38,585		$	253,634
Repricing gap	$	58,747		$	(5,965	)	$	(39,788	)	$	(21,552	)	$	(8,558	)
Cumulative gap	$	58,747		$	52,782		$	12,994		$	(8,558	)	$	(8,558	)
Cumulative gap as a percentage of total assets		20.74	%		18.64	%		4.59	%		(3.02	)%		(3.02	)%
Total assets													$	283,203

⁽¹⁾ Based on scheduled maturity or scheduled repricing and estimated prepayments of principal.

⁽²⁾ Includes investment in FHLBs.

⁽³⁾ Based on projected decay rates and/or repricing periods for checking, savings and money market deposit accounts.

54

PART II—OTHER INFORMATION

Item 4.    Submission of Matters to a Vote of Security Holders.

Washington Mutual, Inc. held its annual meeting of shareholders on April 15, 2003. A brief description of each matter voted on and the results of the shareholder voting are set forth below:

		For	Withheld
1.	The election of five directors set forth below:
	Douglas P. Beighle	700,540,006	75,891,164
	Kerry K. Killinger	756,876,805	19,554,365
	Michael K. Murphy	760,957,644	15,473,526
	Elizabeth A. Sanders	713,836,565	62,594,605
	Willis B. Wood, Jr.	700,879,856	75,551,314
		For	Withheld	Abstain	Broker Non-Votes
2.	Approval of Company’s 2003 Equity Incentive Plan	512,168,570	115,924,281	6,363,828	141,974,491
3.	Approval of Company’s Amended and Restated 2002 Employee Stock Purchase Plan	605,562,449	19,307,709	9,586,752	141,974,260
		For	Withheld	Abstain	Broker Non-Votes
4.	Ratification of the appointment of Deloitte & Touche LLP as the Company’s Independent Auditors	689,948,286	81,176,504	5,305,217	1,163

Each of the following directors who were not up for re-election at the annual meeting of shareholders will continue to serve as directors: Anne V. Farrell, Stephen E. Frank, Phillip D. Matthews, Margaret Osmer McQuade, Mary E. Pugh, William G. Reed, Jr., William D. Schulte and James H. Stever.

Item 6.    Exhibits and Reports on Form 8-K

(a)    Exhibits

See Index of Exhibits on page 57.

(b)    Reports on Form 8-K

1.    The Company filed a report on Form 8-K dated April 15, 2003, under Item 9. The report included a press release reporting Washington Mutual’s results of operations for the first quarter ended March 31, 2003.

55

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on August 14, 2003.

WASHINGTON MUTUAL, INC.
By:	/s/    THOMAS W. CASEY
	Thomas W. Casey Executive Vice President and Chief Financial Officer

By:	/s/    ROBERT H. MILES
	Robert H. Miles Senior Vice President and Controller(Principal Accounting Officer)

56

WASHINGTON MUTUAL, INC.

INDEX OF EXHIBITS

Exhibit No.
3.1	Restated Articles of Incorporation of Washington Mutual, Inc., as amended. (Incorporated by reference to the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. File No. 0-25188).
3.2	Articles of Amendment to the Amended and Restated Articles of Incorporation of Washington Mutual, Inc. creating a class of preferred stock, Series RP. (Incorporated by reference to the Company’s Annual Report on Form 10-K for the year ended December 31, 2000. File No. 001-14667).
3.3	Restated Bylaws of Washington Mutual, Inc., as amended (filed herewith).
4.1	Rights Agreement dated December 20, 2000 between Washington Mutual, Inc. and Mellon Investor Services, LLC (Incorporated by reference to the Company’s Current Report on Form 8-K filed January 8, 2001. File No. 0-25188).
4.2	Washington Mutual, Inc. will furnish upon request copies of all instruments defining the rights of holders of long-term debt instruments of Washington Mutual, Inc. and its consolidated subsidiaries.
4.3	Warrant Agreement dated as of April 30, 2001. (Incorporated by reference to the Company’s Registration Statement on Form S-3. File No. 333-63976).
4.4	2003 Amended and Restated Warrant Agreement, dated March 11, 2003 by and between Washington Mutual, Inc. and Mellon Investor Services LLC. (Incorporated by reference to the Company’s Current Report on Form 8-K, dated March 12, 2003. File No. 001-14667).
31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
99.1	Computation of Ratios of Earnings to Fixed Charges (filed herewith).
99.2	Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends (filed herewith).

57