WASHINGTON MUTUAL INC - 10-Q Quarterly Report

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

FORM 10-Q

(Mark One)

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2002

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO :

Commission File Number 1-14667

WASHINGTON MUTUAL, INC.
(Exact name of registrant as specified in its charter)

Washington (State or Other Jurisdiction of Incorporation or Organization)		91-1653725 (I.R.S. Employer Identification Number)
1201 Third Avenue, Seattle, Washington (Address of Principal Executive Offices)		98101 (Zip Code)

(206) 461-2000
(Registrant's telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

The number of shares outstanding of the issuer's classes of common stock as of October 31, 2002:

Common Stock – 945,677,148⁽¹⁾

⁽¹⁾ Includes 18,000,000 shares held in escrow.

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 2002

TABLE OF CONTENTS

			Page
PART I
	Item 1. Financial Statements		1
		Consolidated Statements of Income – Three and Nine Months Ended September 30, 2002 and 2001	1
		Consolidated Statements of Financial Condition – September 30, 2002 and December 31, 2001	2
		Consolidated Statements of Stockholders' Equity and Comprehensive Income – Nine Months Ended September 30, 2002 and 2001	3
		Consolidated Statements of Cash Flows – Nine Months Ended September 30, 2002 and 2001	4
		Notes to Consolidated Financial Statements	5
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		16
		Summary Financial Data	16
		Controls and Procedures	17
		Cautionary Statements	17
		Overview	18
		Critical Accounting Policies	19
		Recently Issued Accounting Standards	19
		Earnings Performance	20
		Review of Financial Condition	28
		Off-Balance Sheet Activities	33
		Asset Quality	34
		Operating Segments	37
		Liquidity	39
		Capital Adequacy	40
		Market Risk Management	41
		Maturity and Repricing Information	46
	Item 3. Market Risk Management		41
	Item 4. Controls and Procedures		17
PART II Other Information
	Item 6. Exhibits and Reports on Form 8-K		51

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 2001 Annual Report on Form 10-K.

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

			Three Months Ended September 30,						Nine Months Ended September 30,
			2002			2001			2002			2001
			(in millions, except per share amounts)
Interest Income
	Loans		$	2,675		$	2,808		$	8,225		$	8,543
	Available-for-sale ("AFS") securities			652			825			2,411			2,797
	Other interest and dividend income			86			57			245			200

		Total interest income		3,413			3,690			10,881			11,540
Interest Expense
	Deposits			676			735			1,988			2,445
	Borrowings			818			1,139			2,478			4,246

		Total interest expense		1,494			1,874			4,466			6,691

		Net interest income		1,919			1,816			6,415			4,849
	Provision for loan and lease losses			135			200			470			375

		Net interest income after provision for loan and lease losses		1,784			1,616			5,945			4,474
Noninterest Income
	Depositor and other retail banking fees			426			333			1,185			937
	Securities fees and commissions			92			78			272			226
	Insurance income			46			22			132			65
	Single-family residential ("SFR") mortgage banking (expense) income			(1,575	)		(131	)		(1,915	)		407
	Portfolio loan related income			85			49			226			134
	Gain from other AFS securities			356			253			195			209
	Revaluation gain (loss) from derivatives			1,582			(2	)		2,423			(4	)
	Gain on extinguishment of securities sold under agreements to repurchase ("repurchase agreements")			98			125			293			125
	Net settlement income from certain interest-rate swaps			116			–			224			–
	Other income			154			136			361			319

		Total noninterest income		1,380			863			3,396			2,418
Noninterest Expense
	Compensation and benefits			719			507			2,141			1,389
	Occupancy and equipment			289			202			859			576
	Telecommunications and outsourced information services			136			111			409			322
	Depositor and other retail banking losses			55			37			153			99
	Amortization of goodwill			–			31			–			76
	Amortization of other intangible assets			25			17			77			51
	Professional fees			55			51			161			139
	Advertising and promotion			75			52			188			135
	Other expense			271			146			762			499

		Total noninterest expense		1,625			1,154			4,750			3,286

		Income before income taxes		1,539			1,325			4,591			3,606
	Income taxes			563			493			1,680			1,334

Net Income			$	976		$	832		$	2,911		$	2,272

Net Income Attributable to Common Stock			$	975		$	830		$	2,906		$	2,267

Net income per common share:
	Basic		$	1.03		$	0.97		$	3.06		$	2.67
	Diluted			1.01			0.94			3.01			2.63
Dividends declared per common share				0.27			0.23			0.78			0.66
Basic weighted average number of common shares outstanding (in thousands)				947,293			859,497			949,868			848,301
Diluted weighted average number of common shares outstanding (in thousands)				963,422			879,374			966,938			863,206

See Notes to Consolidated Financial Statements.

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

				September 30, 2002			December 31, 2001
				(dollars in millions)
Assets
	Cash and cash equivalents			$	5,122		$	3,563
	Federal funds sold and securities purchased under resale agreements				2,413			2,481
	AFS securities, total amortized cost of $44,563 and $58,783:
		Encumbered			22,976			38,649
		Unencumbered			23,616			19,700

					46,592			58,349
	Loans held for sale				26,440			23,842
	Loans held in portfolio				150,930			132,991
	Allowance for loan and lease losses				(1,705	)		(1,404	)

			Total loans held in portfolio, net of allowance for loan and lease losses		149,225			131,587
	Investment in Federal Home Loan Banks ("FHLBs")				3,792			3,873
	Mortgage servicing rights ("MSR")				4,548			6,241
	Goodwill				6,059			1,981
	Other assets				18,414			10,589

			Total assets	$	262,605		$	242,506

Liabilities
	Deposits:
		Noninterest-bearing deposits		$	27,639		$	22,441
		Interest-bearing deposits			112,969			84,741

			Total deposits		140,608			107,182
	Federal funds purchased and commercial paper				1,845			4,690
	Repurchase agreements				22,381			39,447
	Advances from FHLBs				55,752			61,182
	Other borrowings				13,415			12,576
	Other liabilities				8,443			3,264

			Total liabilities		242,444			228,341
	Redeemable preferred stock				–			102
Stockholders' Equity
	Common stock, no par value: 1,600,000,000 shares authorized, 953,752,443 and 873,089,120 shares issued and outstanding				–			–
	Capital surplus – common stock				6,283			3,178
	Accumulated other comprehensive income (loss)				601			(243	)
	Retained earnings				13,277			11,128

		Total stockholders' equity			20,161			14,063

		Total liabilities, redeemable preferred stock, and stockholders' equity		$	262,605		$	242,506

See Notes to Consolidated Financial Statements.

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, 2000			809.8		$	1,425		$	(54	)	$	8,795		$	10,166
Comprehensive income:
	Net income		–			–			–			2,272			2,272
	Other comprehensive income, net of tax:
		Net unrealized gain from securities arising during the period, net of reclassification adjustments	–			–			798			–			798
		Net unrealized loss on cash flow hedging instruments	–			–			(104	)		–			(104	)

Total comprehensive income															2,966
Cash dividends declared on common stock			–			–			–			(564	)		(564	)
Cash dividends declared on redeemable preferred stock			–			–			–			(5	)		(5	)
Common stock warrants issued, net of issuance costs			–			398			–			–			398
Common stock issued for acquisitions			63.9			1,389			–			–			1,389
Common stock issued			6.1			179			–			–			179

BALANCE, September 30, 2001			879.8		$	3,391		$	640		$	10,498		$	14,529

BALANCE, December 31, 2001			873.1		$	3,178		$	(243	)	$	11,128		$	14,063
Comprehensive income:
	Net income		–			–			–			2,911			2,911
	Other comprehensive income, net of tax:
		Net unrealized gain from securities arising during the period, net of reclassification adjustments	–			–			1,528			–			1,528
		Net unrealized loss on cash flow hedging instruments	–			–			(682	)		–			(682	)
		Minimum pension liability adjustment	–			–			(2	)		–			(2	)

Total comprehensive income															3,755
Cash dividends declared on common stock			–			–			–			(757	)		(757	)
Cash dividends declared on redeemable preferred stock			–			–			–			(5	)		(5	)
Common stock repurchased and retired			(27.1	)		(942	)		–			–			(942	)
Common stock issued for acquisitions			96.4			3,672			–			–			3,672
Fair value of Dime stock options			–			90			–			–			90
Common stock issued to redeem preferred stock			4.3			102			–			–			102
Common stock issued			7.1			183			–			–			183

BALANCE, September 30, 2002			953.8		$	6,283		$	601		$	13,277		$	20,161

See Notes to Consolidated Financial Statements.

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

				Nine Months Ended September 30,
				2002			2001
				(in millions)
Cash Flows from Operating Activities
	Net income			$	2,911		$	2,272
	Adjustments to reconcile net income to net cash provided (used) by operating activities:
		Provision for loan and lease losses			470			375
		Gain from mortgage loans			(889	)		(677	)
		Gain from securities			(214	)		(309	)
		Revaluation (gain) loss from derivatives			(2,423	)		4
		Gain on extinguishment of repurchase agreements			(293	)		(125	)
		Depreciation and amortization			2,173			1,014
		MSR impairment			2,911			692
		Stock dividends from FHLBs			(153	)		(167	)
		Origination and purchases of loans held for sale, net of principal payments			(139,197	)		(79,892	)
		Proceeds from sales of loans held for sale			137,165			70,167
		(Increase) decrease in other assets			(1,653	)		1,278
		Increase in other liabilities			1,824			342

			Net cash provided (used) by operating activities		2,632			(5,026	)
Cash Flows from Investing Activities
	Purchases of securities				(45,940	)		(24,698	)
	Proceeds from sales of mortgage-backed securities ("MBS")				6,257			14,543
	Proceeds from sales and maturities of other AFS securities				53,698			17,247
	Principal payments on securities				6,763			8,480
	Purchases of investment in FHLBs				(4	)		(8	)
	Redemption of investment in FHLBs				668			–
	Proceeds from sale of MSR				822			115
	Origination and purchases of loans, net of principal payments				(8,023	)		(980	)
	Proceeds from sales of loans				5,046			–
	Proceeds from sales of foreclosed assets				252			194
	Net decrease in federal funds sold and securities purchased under resale agreements				68			65
	Net cash used for acquisitions				(2,215	)		(13,693	)
	Purchases of premises and equipment, net				(672	)		(485	)

		Net cash provided by investing activities			16,720			780
Cash Flows from Financing Activities
	Increase in deposits				18,255			12,060
	(Decrease) increase in short-term borrowings				(13,198	)		2,250
	Proceeds from long-term borrowings				30,293			11,973
	Repayments of long-term borrowings				(38,343	)		(21,006	)
	Proceeds from advances from FHLBs				24,901			105,140
	Repayments of advances from FHLBs				(38,159	)		(104,987	)
	Cash dividends paid on preferred and common stock				(762	)		(569	)
	Common stock warrants issued				–			398
	Other				(780	)		153

		Net cash (used) provided by financing activities			(17,793	)		5,412

		Increase in cash and cash equivalents			1,559			1,166
		Cash and cash equivalents, beginning of period			3,563			2,557

		Cash and cash equivalents, end of period		$	5,122		$	3,723

Noncash Activities
	Loans exchanged for MBS			$	5,297		$	2,816
	Real estate acquired through foreclosure				337			273
	Loans originated to facilitate the sale of foreclosed assets				10			11
Cash Paid During the Period for
	Interest on deposits				1,980			2,427
	Interest on borrowings				2,445			4,522
	Income taxes				2,416			556

See Notes to Consolidated Financial Statements.

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1: Business Combinations

The business combinations consummated by Washington Mutual, Inc., and its consolidated subsidiaries (the "Company"), during 2001 and 2002 have been accounted for using the purchase method. Accordingly, the purchase price of each acquisition was first allocated to the tangible assets and liabilities and identifiable intangible assets based on their estimated fair values as of the closing date of the transaction, with the excess purchase price over the fair values recorded as goodwill. Results of operations for the business combinations are included from the date of acquisition.

On January 4, 2002, the Company acquired by merger Dime Bancorp, Inc. ("Dime") for a total purchase price of approximately $5.3 billion, which included approximately $1.5 billion in cash, approximately 96.4 million shares of common stock valued at $37.74 per share, the conversion of 109 million Dime Litigation Tracking Warrants™ ("LTW"), valued at $0.33 per warrant, into the contingent right to receive the Company's common stock, and the conversion of Dime stock options, valued at approximately $90 million, into options to purchase the Company's common stock. For purposes of this merger, Washington Mutual's common stock was valued based upon the average price of Washington Mutual common stock for the five-day trading period from June 21-27, 2001. This acquisition resulted in the recognition of goodwill of approximately $4 billion. This amount, as well as the estimated fair values assigned to the assets received and liabilities assumed, may change as certain estimates and contingencies are finalized.

The Company acquired Dime to expand its retail banking operations into the greater New York metropolitan area. With the addition of the mortgage operations of Dime's subsidiary, North American Mortgage Company, the Company enhanced its position as one of the nation's largest mortgage lending franchises.

In connection with the Dime acquisition, the Company recorded a restructuring liability of $125 million. This liability included an initial reserve of approximately $100 million for severance and other costs related to the Company's announced plan to eliminate approximately 2,900 Dime positions. The majority of the staff reductions are the result of eliminating redundant headquarters and back office positions. The remaining $25 million of the original restructuring liability primarily consisted of disposition costs related to exiting Dime leasehold and other contractual obligations. During the second quarter of 2002, the Company reduced the severance portion of the restructuring liability by approximately $20 million due to a reduction of 900 in the number of Dime positions that were previously expected to be eliminated. During the nine months ended September 30, 2002, the Company utilized approximately $65 million of the severance liability due to the termination of approximately 1,150 employees and utilized $17 million of the restructuring liability related to the exiting of Dime leasehold and other contractual obligations.

The fair value of the net assets acquired in the Dime acquisition was as follows:

			January 4, 2002
			(in millions)
Assets:
	Cash and cash equivalents		$	497
	AFS securities			1,359
	Loans held for sale			5,577
	Loans held in portfolio, net of allowance for loan and lease losses			16,083
	Investment in FHLBs			427
	MSR			926
	Goodwill			4,044
	Other intangible assets			223
	Other assets			2,152

		Total assets	$	31,288

Liabilities:
	Deposits		$	15,171
	Borrowings			10,126
	Other liabilities			715

		Total liabilities		26,012

		Net assets acquired	$	5,276

Other intangible assets are a core deposit intangible with an estimated useful life of 7 years. None of the goodwill balance is expected to be deductible for tax purposes.

Unaudited Pro Forma Combined Financial Data Reflecting the Dime Acquisition

The unaudited pro forma combined amounts presented below give effect to the merger with Dime as if it had been consummated on January 1, 2001. As the acquisition occurred on January 4, 2002, the pro forma combined information for the three and nine months ended September 30, 2002, would not be materially different from the actual results for those periods and, therefore, is not presented. The unaudited pro forma information is not necessarily indicative of the results of operations that would have resulted had the merger been completed at the beginning of the applicable periods presented, nor is it necessarily indicative of the results of operations in future periods.

		Three Months Ended September 30, 2001		Nine Months Ended September 30, 2001
		(in millions, except per share amounts)
Net interest income		$	2,011	$	5,391
Provision for loan and lease losses			214		417
Noninterest income			1,055		2,996
Noninterest expense			1,355		3,888
Income taxes			553		1,499
Net income			944		2,583
Net income attributable to common stock			942		2,578
Weighted average number of common shares outstanding (in thousands)
	Basic		955,858		944,662
	Diluted		975,735		959,567
Net income per common share
	Basic	$	0.99	$	2.73
	Diluted	$	0.97	$	2.69

Other Acquisitions

In addition to the acquisition of Dime, the Company acquired certain operating assets of HomeSide Lending, Inc. ("HomeSide") on March 1, 2002 for approximately $1.2 billion in cash. With this acquisition, the Company acquired approximately $1 billion in loans held for sale and a servicing technology platform valued at $52 million. As part of this acquisition, the Company agreed to subservice HomeSide's mortgage servicing portfolio.

On October 1, 2002, the Company also acquired the ownership of HomeSide for approximately $1.3 billion in cash. With this acquisition the Company acquired approximately $1.2 billion in MSR pertaining to the mortgage servicing portfolio it subservices for HomeSide, a net fair value of $850 million in derivative instruments (which are used to hedge MSR) and $500 million in other assets, and assumed $760 million in long-term debt and $500 million in other liabilities. Substantially all of the HomeSide subservicing portfolio became primary servicing after this acquisition was completed on October 1, 2002.

Note 2: Earnings Per Share

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

			Three Months Ended September 30,						Nine Months Ended September 30,
			2002			2001			2002			2001
			(dollars in millions, except per share amounts)
Net income
	Net income		$	976		$	832		$	2,911		$	2,272
	Accumulated dividends on preferred stock			(1	)		(2	)		(5	)		(5	)

	Net income attributable to common stock		$	975		$	830		$	2,906		$	2,267

Weighted average shares (in thousands)
	Basic weighted average number of common shares outstanding			947,293			859,497			949,868			848,301
	Dilutive effect of potential common shares from:
		Stock options		8,460			9,336			8,991			9,050
		Premium Income Equity Securities ^SM(1)		775			1,782			1,269			1,372
		Trust Preferred Income Equity Redeemable Securities^SM		6,894			8,759			6,810			4,483

	Diluted weighted average number of common shares outstanding			963,422			879,374			966,938			863,206

Net income per common share
	Basic		$	1.03		$	0.97		$	3.06		$	2.67
	Diluted			1.01			0.94			3.01			2.63

⁽¹⁾: Redeemed on August 16, 2002.

For the three and nine months ended September 30, 2002, options to purchase an additional 464,025 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 nine months ended September 30, 2001, options to purchase an additional 42,680 and 97,418 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. (parent of American Savings Bank, F.A.), 18 million shares of common stock, with an assigned value of $18.49 per share, are held in escrow for the benefit of the general and limited partners of Keystone Holdings, Inc., the Federal Savings and Loan Insurance Corporation Resolution Fund and their transferees. The conditions

under which these shares can be released from escrow are related to the outcome of certain litigation and not based on future earnings or market prices. At September 30, 2002, the conditions were not met, and, therefore, the shares were not included in the above computations. The escrow will expire on December 20, 2002, subject to extensions in certain circumstances. If not all Escrow Shares are released prior to such expiration, any remaining Escrow Shares will be returned to the Company for cancellation.

Note 3: Mortgage Banking Activities

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

			Three Months Ended September 30,						Nine Months Ended September 30,
			2002			2001			2002			2001
			(in millions)
Balance, beginning of period			$	477,309		$	365,699		$	382,500		$	85,875
	SFR:
		Additions through acquisitions		–			–			49,242			255,634
		Other additions		52,910			40,963			162,067			97,521
		Sales		–			(4,124	)		–			(4,124	)
		Loan payments		(51,957	)		(26,333	)		(115,576	)		(59,512	)
	Net change in commercial real estate loans serviced for others			13			43			42			854

Balance, end of period			$	478,275		$	376,248		$	478,275		$	376,248

Changes in the balance of MSR, net of the valuation allowance, were as follows:

			Three Months Ended September 30,						Nine Months Ended September 30,
			2002			2001			2002			2001
			(in millions)
Balance, beginning of period			$	6,489		$	6,799		$	6,241		$	1,017
	SFR:
		Additions through acquisitions		–			–			926			4,823
		Other additions		732			884			2,810			2,305
		Amortization		(713	)		(293	)		(1,696	)		(624	)
		Impairment		(1,849	)		(554	)		(2,911	)		(692	)
		Sales		(111	)		(115	)		(822	)		(115	)
	Net change in commercial real estate MSR			–			–			–			7

Balance, end of period⁽¹⁾			$	4,548		$	6,721		$	4,548		$	6,721

⁽¹⁾: At September 30, 2002 and 2001, aggregate MSR fair value was $4.57 billion and $6.79 billion.

Changes in the valuation allowance for MSR were as follows:

		Three Months Ended September 30,					Nine Months Ended September 30,
		2002			2001		2002			2001
		(in millions)
Balance, beginning of period		$	2,568		$	150	$	1,714		$	12
	Impairment		1,849			554		2,911			692
	Sales		(97	)		–		(305	)		–

Balance, end of period		$	4,320		$	704	$	4,320		$	704

At September 30, 2002, the expected weighted average life of the Company's MSR was 3.7 years. Projected amortization expense for the gross carrying value of MSR at September 30, 2002 is estimated to be as follows (in millions):

Remainder of 2002		$	858
2003			2,351
2004			1,367
2005			949
2006			705
2007			540
After 2007			2,098

Gross carrying value of MSR			8,868
Less: valuation allowance			4,320

	Net carrying value of MSR	$	4,548

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 actual MSR prepayment experience, that were used to determine amortization expense for the third quarter of 2002. 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: Goodwill and Other Intangible Assets

The results for the three and nine months ended September 30, 2002, include the effect of adopting Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires that goodwill not be amortized and the value of an identifiable intangible asset must be amortized over its useful life, unless the asset is determined to have an indefinite useful life. Goodwill must be tested for impairment at the reporting unit level as of the beginning of the fiscal year in which SFAS No. 142 is adopted and at least annually thereafter. A reporting unit represents an operating segment or a component of an operating segment. The Company has identified four reporting units for purposes of impairment testing.

The Company performed a transitional impairment test on the goodwill of each reporting unit using a discounted cash flow model and determined that the fair value of each reporting unit's total assets, net of total liabilities, exceeded the recorded book value of that reporting unit and its goodwill at January 1, 2002. During the third quarter of 2002, the Company performed its annual impairment test and concluded there was no impairment to the book value of the Company's goodwill. Absent any impairment indicators, the Company expects to perform its next impairment test during the third quarter of 2003.

Had the Company been accounting for its goodwill under SFAS No. 142 for all periods presented, the Company's net income and earnings per share would have been as follows:

		Three Months Ended September 30,						Nine Months Ended September 30,
		2002			2001			2002			2001
		(in millions, except per share amounts)
Net Income:
	Income before income taxes	$	1,539		$	1,325		$	4,591		$	3,606
	Add back: goodwill previously amortized		–			31			–			76

	Income before income taxes, excluding amortization of goodwill		1,539			1,356			4,591			3,682
	Income taxes		(563	)		(493	)		(1,680	)		(1,338	)

	Net income, excluding amortization of goodwill		976			863			2,911			2,344
	Redeemable preferred stock dividends		(1	)		(2	)		(5	)		(5	)

	Adjusted net income attributable to common stock	$	975		$	861		$	2,906		$	2,339

Basic earnings per share:
	Net income, as reported	$	1.03		$	0.97		$	3.06		$	2.67
	Goodwill amortization, net of tax		–			0.04			–			0.09
	Adjusted net income		1.03			1.01			3.06			2.76
Diluted earnings per share:
	Net income, as reported	$	1.01		$	0.94		$	3.01		$	2.63
	Goodwill amortization, net of tax		–			0.04			–			0.08
	Adjusted net income		1.01			0.98			3.01			2.71

		Year Ended December 31,
		2001			2000			1999
		(in millions, except per share amounts)
Net Income:
	Income before income taxes	$	4,932		$	2,984		$	2,884
	Add back: goodwill previously amortized		104			47			49

	Income before income taxes, excluding amortization of goodwill		5,036			3,031			2,933
	Income taxes		(1,824	)		(1,087	)		(1,074	)

	Net income, excluding amortization of goodwill		3,212			1,944			1,859
	Redeemable preferred stock dividends		(7	)		–			–

	Adjusted net income attributable to common stock	$	3,205		$	1,944		$	1,859

Basic earnings per share:
	Net income, as reported	$	3.65		$	2.37		$	2.12
	Goodwill amortization, net of tax		0.12			0.06			0.05
	Adjusted net income		3.77			2.43			2.17
Diluted earnings per share:
	Net income, as reported	$	3.59		$	2.36		$	2.11
	Goodwill amortization, net of tax		0.12			0.06			0.05
	Adjusted net income		3.71			2.42			2.16

Changes in the carrying amount of goodwill for the nine months ended September 30, 2002, by reporting unit were as follows:

		Nine Months Ended September 30, 2002
						Specialty Finance
		Banking and Financial Services		Home Loans and Insurance Services		WM Finance		Commercial Lending		Total
		(in millions)
Balance at January 1, 2002		$	436	$	1,179	$	59	$	307	$	1,981
	Additions related to Dime		2,472		839		–		733		4,044
	Other		34		–		–		–		34

Balance at September 30, 2002		$	2,942	$	2,018	$	59	$	1,040	$	6,059

During the first quarter of 2002, the Company acquired a $223 million core deposit intangible and $3 million of other intangible assets as a result of the acquisitions of Dime and HomeSide. During the second quarter of 2002, the Company increased goodwill associated with the Dime acquisition by $59 million due to various adjustments to the fair values assigned to the assets received and liabilities assumed and a $77 million adjustment of the total purchase price related to the valuation of Dime stock options. During the third quarter of 2002, the Company increased the goodwill associated with the Dime acquisition by $32 million due to an adjustment of $17 million related to the sale of the Dime auto-finance loan portfolio and an increase in the estimated accumulated post-retirement benefit obligation for Dime employees of $15 million.

Intangible asset balances (excluding MSR) as of September 30, 2002 were as follows:

		September 30, 2002
		Carrying Amount		Accumulated Amortization		Net		Weighted Average Useful Life
		(in millions)
Core deposit intangible		$	633	$	305	$	328	8.5 years
Unidentifiable intangible assets related to acquired branches			488		321		167	13.5 years
Other intangible assets			5		2		3	7.1 years

	Total intangible assets	$	1,126	$	628	$	498	10.7 years

The Company has no identifiable intangible assets with indefinite useful lives.

Amortization expense for the net carrying amount of intangible assets (excluding MSR) at September 30, 2002 is estimated to be as follows (in millions):

Remainder of 2002			$	17
2003				62
2004				56
2005				53
2006				52
2007				52
After 2007				39

	Estimated future amortization expense of intangible assets			331
	Unidentifiable intangible assets related to acquired branches⁽¹⁾			167

		Net carrying amount of intangible assets	$	498

⁽¹⁾: Refer to Note 7 to the Consolidated Financial Statements for further discussion.

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 product type and customer segments.

The Company continues to enhance its segment reporting process methodologies. These methodologies 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 allocates net interest income between funds users and funds providers; (2) a calculation of the provision for loan and lease losses based on management's current assessment of the expected losses 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 generally accepted accounting principles; and (3) the utilization of an activity-based costing approach to measure allocations of certain operating expenses that were not directly charged to the segments. Changes to the operating segment structure and to certain of the foregoing performance measurement methodologies were made during the nine months ended September 30, 2002. Results for the prior periods have been revised to conform to these changes. Due to the very low interest rate environment that has existed throughout the current year, the Company plans to revise its funds transfer pricing rate structure during the fourth quarter of 2002. In general, this change will reduce the interest income credit that is allocated to funds providers.

The Banking and Financial Services Group ("Banking & FS") offers a comprehensive line of consumer and business financial products and services to individuals and small and middle market businesses. In addition to traditional banking products, Banking & FS offers investment management and securities brokerage services, and distributes annuity products through the Company's subsidiaries and affiliates. The group's services are offered through multiple delivery channels, including financial centers, business banking centers, ATMs, the internet and 24-hour telephone banking centers.

The Home Loans and Insurance Services Group ("Home Loans Group") originates, purchases, sells, securitizes and services the Company's SFR mortgage loans. These mortgage assets may either be retained in the Company's portfolio, sold or securitized. The group's loan products are made available to consumers through various distribution channels, which include retail home loan centers, financial centers, correspondent financial institutions, prime and specialty wholesale home loan centers, consumer direct contact through call centers and the internet. The Home Loans Group also includes the activities of Washington Mutual Insurance Services, Inc., an insurance agency that supports the mortgage lending process, as well as the insurance needs of consumers doing business with the Company. Additionally, the Home Loans Group manages the Company's captive private mortgage and hazard reinsurance activities. Beginning with the three months ended September 30, 2002, the MSR risk management activities associated with the group's MSR portfolio are reflected in the Home Loans Group. This was a change of ownership in the MSR risk management instruments from Corporate Support/Treasury & Other to the Home Loans Group, not a change in methodologies, as the income activity on these instruments was previously allocated to the Home Loans Group.

The Specialty Finance Group conducts operations through the Company's banking subsidiaries and Washington Mutual Finance Corporation ("Washington Mutual Finance"). The Specialty Finance Group primarily provides real estate secured financing for multi-family properties. Commercial real estate lending, residential builder construction finance (recently renamed Home Builder Finance) and mortgage banker financing are also part of the group's secured financing activities. This group also offers commercial

banking services to its customers and conducts a consumer finance business through Washington Mutual Finance.

The Corporate Support/Treasury & Other category includes management of the Company's interest rate risk, liquidity, capital, borrowings and purchased investment 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, human resources and community reinvestment functions. Also reported in this category are the net impact of transfer pricing for loan and deposit balances including the effects of changes in interest rates on the Company's net interest margin, the difference between the expected loss-based provision for loan and lease losses for the operating segments and the Company's provision, the effects of inter-segment allocations of financial hedge gains and losses, and the elimination of inter-segment noninterest income and noninterest expense.

Financial highlights by operating segment were as follows:

			Three Months Ended September 30, 2002
			Banking and Financial Services		Home Loans and Insurance Services		Specialty Finance		Corporate Support/Treasury & Other			Total
			(in millions)
Condensed income statement:
	Net interest income		$	967	$	997	$	305	$	(350	)	$	1,919
	Provision for loan and lease losses			46		61		60		(32	)		135
	Noninterest income			563		969		5		(157	)		1,380
	Noninterest expense			783		619		74		149			1,625
	Income taxes			266		482		66		(251	)		563

	Net income		$	435	$	804	$	110	$	(373	)	$	976

		Average loans	$	21,463	$	119,941	$	30,318	$	178		$	171,900
		Average assets		25,944		174,079		31,855		29,270			261,148
		Average deposits		116,579		12,697		2,938		3,259			135,473

			Three Months Ended September 30, 2001
			Banking and Financial Services		Home Loans and Insurance Services		Specialty Finance		Corporate Support/Treasury & Other			Total
			(in millions)
Condensed income statement:
	Net interest income		$	551	$	443	$	244	$	578		$	1,816
	Provision for loan and lease losses			35		61		61		43			200
	Noninterest income			482		409		16		(44	)		863
	Noninterest expense			628		333		62		131			1,154
	Income taxes			142		182		53		116			493

	Net income		$	228	$	276	$	84	$	244		$	832

		Average loans	$	13,675	$	109,815	$	27,910	$	530		$	151,930
		Average assets		17,783		149,347		29,364		31,963			228,457
		Average deposits		82,418		9,638		2,935		4,185			99,176

			Nine Months Ended September 30, 2002
			Banking and Financial Services		Home Loans and Insurance Services			Specialty Finance		Corporate Support/Treasury & Other			Total
			(in millions)
Condensed income statement:
	Net interest income		$	2,617	$	2,760		$	883	$	155		$	6,415
	Provision for loan and lease losses			145		184			183		(42	)		470
	Noninterest income			1,614		1,965	⁽¹⁾		48		(231	)		3,396
	Noninterest expense			2,215		1,724			225		586			4,750
	Income taxes			709		1,069			197		(295	)		1,680

	Net income		$	1,162	$	1,748		$	326	$	(325	)	$	2,911

		Average loans	$	20,463	$	121,009		$	30,219	$	149		$	171,840
		Average assets		24,862		164,797			31,663		49,369			270,691
		Average deposits		110,772		11,466			2,780		5,015			130,033

⁽¹⁾: Includes a $1.07 billion allocation of pretax net financial hedge gains transferred from the Corporate Support/Treasury & Other category for the nine months ended September 30, 2002.

			Nine Months Ended September 30, 2001
			Banking and Financial Services		Home Loans and Insurance Services		Specialty Finance		Corporate Support/Treasury & Other			Total
			(in millions)
Condensed income statement:
	Net interest income		$	1,659	$	1,410	$	723	$	1,057		$	4,849
	Provision for loan and lease losses			99		183		185		(92	)		375
	Noninterest income			1,312		1,017		49		40			2,418
	Noninterest expense			1,803		851		184		448			3,286
	Income taxes			411		549		153		221			1,334

	Net income		$	658	$	844	$	250	$	520		$	2,272

		Average loans	$	12,839	$	105,082	$	27,818	$	348		$	146,087
		Average assets		16,397		146,563		28,862		30,124			221,946
		Average deposits		81,702		6,714		2,528		3,182			94,126

Note 6: Derivative Financial Instruments

During the quarter, the Company removed its cash flow hedge designation on certain payor swaptions because it was probable that the underlying hedged items, which were interest payments on anticipated issuances of certain five-year adjustable-rate borrowings, were not going to occur by the end of the originally specified time periods or within the additional periods of time allowed by SFAS No. 133. This change in anticipated issuances of debt is mainly related to the Company's rising deposit balances, which has decreased its reliance on long-term adjustable-rate borrowings as a source of funding. Thus, in accordance with SFAS No. 133, the accumulated loss of $112 million related to these payor swaptions at September 30, 2002 was reclassified from accumulated other comprehensive income in the Consolidated Statements of Financial Condition to revaluation gain (loss) from derivatives in the Consolidated Statements of Income.

Note 7: Recently Adopted Accounting Standards

In April 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 145, Rescission of FASB Statements No.4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections, that, among various topics, eliminated the requirement that all forms of gains or losses on debt extinguishments, such as the liquidation of repurchase agreements, be reported as extraordinary items. The early termination of repurchase agreements is a normal part of our asset and liability management strategy. As encouraged by this pronouncement, we applied the provisions of SFAS No. 145 related to the treatment of debt extinguishments as of January 1, 2002. Accordingly, the gain from extinguishment of repurchase agreements for the three and nine months ended September 30, 2002 in the amount of $98 million and $293 million is now recorded as a component of noninterest income. Also, the gain from extinguishment of repurchase agreements of $125 million that was recorded as an extraordinary item, on a net-of-tax basis, for the three and nine months ended September 30, 2001 has been reclassified to noninterest income. Similar gains that were recorded as extraordinary items in the fourth quarter of 2001 will likewise be reclassified to noninterest income when comparative financial statements that include this prior period are presented.

In October 2002, the FASB issued SFAS No. 147, Acquisitions of Certain Financial Institutions. This Statement amends Statements No. 72 and 144 and FASB Interpretation No. 9. Among other topics, this Statement requires that an unidentifiable intangible asset that is recognized in an acquisition of a financial institution, which is accounted for as a business combination, in which the liabilities assumed exceed the identifiable assets acquired, be recorded as goodwill. Consequently, this unidentifiable intangible asset will be subject to the goodwill accounting standards set forth in SFAS No. 142, Goodwill and Other Intangible Assets, and will be evaluated for impairment on an annual basis instead of being amortized. The Company, which owns intangible assets of this nature, adopted this Statement as of October 1, 2002. Upon adoption, after-tax amortization of $24 million that had been recognized during the nine months ended September 30, 2002 will be eliminated and, as required by this Statement, the financial statements for the first three quarters of 2002 will be restated as if this new accounting standard had been applied as of the beginning of the year.

Summary Financial Data

				Three Months Ended September 30,						Nine Months Ended September 30,
				2002			2001			2002			2001
				(in millions, except per share amounts and ratios)
PROFITABILITY
		Net interest income		$	1,919		$	1,816		$	6,415		$	4,849
		Net interest margin			3.36	%		3.53	%		3.55	%		3.14	%
		Noninterest income		$	1,380		$	863		$	3,396		$	2,418
		Noninterest expense			1,625			1,154			4,750			3,286
		Net income			976			832			2,911			2,272
		Net income per common share:
			Basic	$	1.03		$	0.97		$	3.06		$	2.67
			Diluted		1.01			0.94			3.01			2.63
		Basic weighted average number of common shares outstanding (in thousands)			947,293			859,497			949,868			848,301
		Diluted weighted average number of common shares outstanding (in thousands)			963,422			879,374			966,938			863,206
		Return on average assets			1.49	%		1.46	%		1.43	%		1.36	%
		Return on average common equity			18.70			23.64			19.78			23.60
		Efficiency ratio, excluding amortization of other intangible assets			48.48			41.29	⁽¹⁾		47.64			43.48	⁽¹⁾
		Efficiency ratio, including amortization of other intangible assets			49.25			43.09	⁽²⁾		48.42			45.23	⁽²⁾
ASSET QUALITY
	Period end:
		Nonaccrual loans⁽³⁾		$	2,188		$	1,726		$	2,188		$	1,726
		Foreclosed assets			309			221			309			221
		Total nonperforming assets			2,497			1,947			2,497			1,947
		Restructured loans			112			128			112			128
			Total nonperforming assets and restructured loans		2,609			2,075			2,609			2,075
		Allowance for loan and lease losses			1,705			1,295			1,705			1,295
			Allowance as a percentage of total loans held in portfolio		1.13	%		0.97	%		1.13	%		0.97	%
	Period-to-date:
		Provision for loan and lease losses		$	135		$	200		$	470		$	375
		Net charge-offs			88			75			303			208
CAPITAL ADEQUACY
		Stockholders' equity/total assets			7.68	%		6.50	%		7.68	%		6.50	%
		Stockholders' equity⁽⁴⁾/total assets⁽⁴⁾			7.51			6.24			7.51			6.24
		Tangible common equity⁽⁴⁾⁽⁵⁾/total assets⁽⁴⁾⁽⁵⁾			5.27			5.41			5.27			5.41
		Estimated total risk-based capital/risk-weighted assets⁽⁶⁾			11.16			12.35			11.16			12.35

⁽¹⁾: Excludes amortization of goodwill.
⁽²⁾: Includes amortization of goodwill.
⁽³⁾: Excludes nonaccrual loans held for sale.
⁽⁴⁾: Excludes unrealized net gain/loss on available-for-sale securities and derivatives.
⁽⁵⁾: Excludes goodwill and intangible assets but includes mortgage servicing rights.
⁽⁶⁾: Estimate of what the total risk-based capital ratio would be if Washington Mutual, Inc. were a bank holding company that complied with Federal Reserve Board capital requirements.

			Three Months Ended September 30,				Nine Months Ended September 30,
			2002		2001		2002		2001
			(in millions, except per share amounts and ratios)
SUPPLEMENTAL DATA
	Average balance sheet:
		Average loans	$	171,900	$	151,930	$	171,840	$	146,087
		Average interest-earning assets		229,364		206,799		240,253		205,113
		Average total assets		261,148		228,457		270,691		221,946
		Average interest-bearing deposits		111,408		80,485		107,858		78,878
		Average noninterest-bearing deposits		24,065		18,691		22,175		15,248
		Average stockholders' equity		20,858		14,054		19,587		12,808
	Period-end balance sheet:
		Total loans held in portfolio, net of allowance for loan and lease losses		149,225		131,605		149,225		131,605
		Total loans held for sale		26,440		18,035		26,440		18,035
		Total interest-earning assets		230,167		202,636		230,167		202,636
		Total assets		262,605		223,638		262,605		223,638
		Total interest-bearing deposits		112,969		81,062		112,969		81,062
		Total noninterest-bearing deposits		27,639		18,671		27,639		18,671
		Total stockholders' equity		20,161		14,529		20,161		14,529
	Dividends declared per common share		$	0.27	$	0.23	$	0.78	$	0.66

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 within 90 days before the filing date of this quarterly report. Based on that evaluation, the Company's management, including the CEO and CFO, concluded that the Company's disclosure controls and procedures were effective. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to their evaluation.

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.

Cautionary Statements

This section contains forward-looking statements, which are not historical facts and pertain to our future operating results. These forward-looking statements are within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, but are not limited to, statements about our plans, objectives, expectations and intentions and other statements contained in this report that are not historical facts. When used in this report, the words "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" are generally intended to identify forward-looking statements. These forward-looking statements are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and

decisions that are subject to change. Actual results may differ materially from the results discussed in these forward-looking statements due to the following factors, among others:

•: changes in general business and economic conditions may significantly affect our earnings;
•: our inability to effectively manage the volatility of our mortgage banking business could adversely affect our earnings;
•: the impact of rising interest rates may increase our cost of interest-bearing liabilities, which could outpace the increase in the yield on interest-earning assets and lead to a reduction in the net interest margin, along with potential decreases in mortgage loan volumes and a corresponding reduction in gain from mortgage loans;
•: the impact of falling interest rates may accelerate mortgage prepayment rates, which would increase the impairment on mortgage servicing rights ("MSR") and may result in balance sheet shrinkage causing a potential reduction in net interest income;
•: our inability to effectively integrate the operations and personnel of companies we have acquired could adversely affect our earnings and financial condition;
•: the concentration of operations in California could adversely affect our operating results if the California economy or real estate market declines;
•: competition from other financial services companies in our markets could adversely affect our ability to achieve our financial goals; and
•: changes in the regulation of financial services companies could adversely affect our business.

Overview

Washington Mutual, Inc. is a financial services company committed to serving consumers and small to mid-sized businesses. When we refer to "we" or "Washington Mutual" or the "Company" in this Form 10-Q, we mean Washington Mutual, Inc., and its consolidated subsidiaries. We accept deposits from the general public, originate, purchase, service and sell residential loans, make consumer loans and commercial real estate loans (primarily loans secured by multi-family properties), and engage in certain commercial banking activities such as providing credit facilities and cash management and deposit services. We originate, purchase, sell and service specialty mortgage finance loans and provide direct installment loans and purchase retail installment contracts. We also market annuities and other insurance products, offer full service securities brokerage services, and act as the investment advisor to, and the distributor of, mutual funds.

During the first quarter of 2002, the Company completed two acquisitions. On January 4, 2002, we completed our acquisition of New York-based Dime Bancorp, Inc. ("Dime"). This acquisition added approximately $31 billion to our asset base and increased our deposit base by approximately $15 billion. On March 1, 2002, we acquired for cash, certain operating assets of HomeSide Lending, Inc. ("HomeSide"), the U.S. mortgage unit of the National Australia Bank Limited ("National"). National retained ownership of HomeSide, thereby retaining ownership of HomeSide's MSR, along with the related risk management instruments and certain other assets and liabilities. On October 1, 2002, the Company also acquired the ownership of HomeSide for approximately $1.3 billion in cash. With this acquisition the Company acquired approximately $1.2 billion in MSR pertaining to the mortgage servicing portfolio it subservices for HomeSide, a net fair value of $850 million in derivative instruments (which are used to hedge MSR) and $500 million in other assets, and assumed $760 million in long-term debt and $500 million in other liabilities.

The acquisition of Dime also contributed significantly to the growth in our mortgage lending business, and accordingly, resulted in significant increases in our MSR and our loans serviced for others portfolio. At

the date of acquisition, Dime added $926 million to the MSR balance and also added $49,242 million to the loans serviced for others portfolio.

Variances in the amounts reported on the Consolidated Statements of Income between the three months ended September 30, 2002 and the comparable period in 2001 are partially attributable to the results from the aforementioned acquisitions, which are included within the consolidated results of the Company from the date of acquisition.

Variances in the amounts reported on the Consolidated Statements of Income between the nine months ended September 30, 2002 and the comparable period in 2001 are partially attributable to the results from the aforementioned acquisitions as well as the acquisition of Fleet Mortgage Corp. ("Fleet"). These acquisitions were included within the consolidated results of the Company from the date of acquisition.

Critical Accounting Policies

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 two policies that, due to the judgments, estimates and assumptions inherent in those policies, are critical to an understanding of our financial statements. These policies relate to the valuation of our MSR and rate lock commitments, and the methodology that determines our allowance for loan and lease losses. The valuation of MSR and rate lock commitments is described in greater detail in Management's Discussion and Analysis on pages 24 and 25 and the methodology that determines the allowance for loan and lease losses is described in greater detail in Management's Discussion and Analysis on page 36.

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 ("SFAS" or "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 subsequent sections of Management's Discussion and Analysis and in Note 1 to the Consolidated Financial Statements included in the Company's 2001 Annual Report on Form 10-K. We believe that the judgments, estimates and assumptions used in the preparation of our Consolidated Financial Statements are appropriate given the factual circumstances at the time. However, given the sensitivity of our Consolidated Financial Statements to these critical accounting policies, the use of other judgments, estimates and assumptions could result in material differences in our results of operations or financial condition.

Recently Issued Accounting Standards

In June 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities. This Statement requires that a liability for costs associated with an exit or disposal activity be recognized when the liability is incurred and be measured at fair value and adjusted for changes in estimated cash flows. Existing generally accepted accounting principles provide for the recognition of such costs at the date of management's commitment to an exit plan. Under SFAS No. 146, management's commitment to an exit plan would not be sufficient, by itself, to recognize a liability. The Statement is effective for exit or disposal activities initiated after December 31, 2002 and is not expected to have a material impact on the results of operations or financial condition of the Company.

identifiable assets acquired, be recorded as goodwill. Consequently, this unidentifiable intangible asset will be subject to the goodwill accounting standards set forth in SFAS No. 142, Goodwill and Other Intangible Assets, and will be evaluated for impairment on an annual basis instead of being amortized. The Company, which owns intangible assets of this nature, adopted this Statement as of October 1, 2002. Upon adoption, after-tax year-to-date amortization of $24 million that had been recognized through September 30, 2002 will be eliminated and, as required by this Statement, the financial statements for the first three quarters of 2002 will be restated as if this new accounting standard had been applied as of the beginning of the year.

Earnings Performance

Net Interest Income

Despite a decline in interest income, for the three months ended September 30, 2002, net interest income increased $103 million or 6% compared with the same period in 2001. The increase in net interest income is due to an increase in average interest-earning assets, which was substantially due to the loan portfolio acquired from Dime. This volume related increase in net interest income was partially offset by a decrease in the net interest margin. The decrease in the margin was primarily due to the impact of declining loan yields, which was partially offset by lower wholesale borrowing rates and lower rates on interest-bearing deposits, other than checking accounts. Our loan portfolio continued to reprice downward from the interest rate environment that was in effect throughout 2001. Our wholesale borrowing rates, which reprice more quickly to current market rates than our interest-earning assets, benefited from the 125 basis point reduction in the Federal Funds rate that occurred during the fourth quarter of 2001. The rate on interest-bearing checking experienced a significant increase due to the rates offered on Platinum Checking accounts. The average rate paid on Platinum Checking accounts during the three months ended September 30, 2002 was 2.89%. During the three months ended September 30, 2002, the average balance of Platinum Checking accounts was $40,436 million compared with $530 million during the same period in 2001.

For the nine months ended September 30, 2002, net interest income increased $1.57 billion or 32% compared with the same period in 2001, primarily as a result of an increase of $35.14 billion in average interest-earning assets, a majority of which resulted from the Dime and Fleet acquisitions. The increase in net interest income was also attributable to a 41 basis point increase in the net interest margin during the period. The margin benefited from lower wholesale borrowing costs, which declined due to last year's 475 basis point reduction in the Federal Funds rate.

Interest rate contracts held for asset/liability interest rate risk management purposes decreased net interest income by $146 million and $275 million for the three and nine months ended September 30, 2002 and $20 million and $80 million for the same periods in 2001.

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 September 30,
						2002						2001
						Average Balance		Rate		Interest Income or Expense		Average Balance		Rate		Interest Income or Expense
										(dollars in millions)
Assets
Interest-earning assets:
	Federal funds sold and securities purchased under resale agreements					$	3,707	1.74	%	$	17	$	134	3.67	%	$	3
	Available-for-sale ("AFS") securities⁽¹⁾:
		Mortgage-backed securities ("MBS")					24,882	5.53			344		37,863	6.83			646
		Investment securities					24,472	5.02			308		12,739	5.61			179
	Loans⁽²⁾⁽³⁾:
		Single-family residential ("SFR")					109,265	5.66			1,545		100,548	6.82			1,714
		Specialty mortgage finance⁽⁴⁾					11,078	9.29			257		9,788	9.87			242

			Total SFR				120,343	5.99			1,802		110,336	7.09			1,956
		SFR construction⁽⁵⁾					2,105	6.57			35		2,821	8.00			57
		Second mortgage and other consumer:
			Banking subsidiaries				16,762	6.50			273		9,946	8.05			201
			Washington Mutual Finance Corporation ("Washington Mutual Finance")				2,695	16.29			110		2,543	16.56			106
		Commercial business					5,007	5.69			72		5,302	6.91			93
		Commercial real estate:
			Multi-family				18,106	5.93			269		16,329	7.46			305
			Other commercial real estate				6,882	6.55			114		4,653	7.65			90

				Total loans			171,900	6.21			2,675		151,930	7.38			2,808
	Other						4,403	6.23			69		4,133	5.21			54

					Total interest-earning assets		229,364	5.94			3,413		206,799	7.13			3,690
Noninterest-earning assets:
	MSR						5,933						7,069
	Goodwill						6,038						2,083
	Other						19,813						12,506

				Total assets		$	261,148					$	228,457

Liabilities
Interest-bearing liabilities:
	Deposits:
		Interest-bearing checking				$	46,508	2.59			304	$	6,632	0.86			14
		Savings accounts and money market deposit accounts ("MMDAs")					29,963	1.45			109		36,532	2.88			266
		Time deposit accounts					34,937	2.98			263		37,321	4.84			455

			Total interest-bearing deposits				111,408	2.41			676		80,485	3.62			735
	Federal funds purchased and commercial paper						1,983	1.43			7		4,309	3.71			40
	Securities sold under agreements to repurchase ("repurchase agreements")						26,814	3.06			207		27,353	3.29			227
	Advances from Federal Home Loan Banks ("FHLBs")						56,926	3.00			431		62,614	4.17			658
	Other						13,549	5.06			173		15,459	5.51			214

				Total interest-bearing liabilities			210,680	2.81			1,494		190,220	3.91			1,874

Noninterest-bearing sources:
	Noninterest-bearing deposits						24,065						18,691
	Other liabilities						5,545						5,492
Stockholders' equity							20,858						14,054

				Total liabilities and stockholders' equity		$	261,148					$	228,457

Net interest spread and net interest income								3.13		$	1,919			3.22		$	1,816

Impact of noninterest-bearing sources								0.23						0.31
Net interest margin								3.36						3.53

⁽¹⁾: Yield is based on average amortized cost balances.
⁽²⁾: Nonaccrual loans were included in the average loan amounts outstanding.
⁽³⁾: Interest income for loans includes amortization of net deferred loan origination costs of $56 million and $44 million for the three months ended September 30, 2002 and 2001.
⁽⁴⁾: Includes purchased subprime loans as well as first mortgages originated by Washington Mutual Finance and Long Beach Mortgage.
⁽⁵⁾: Includes loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale, and loans made directly to the intended occupant of a single-family residence.

					Nine Months Ended September 30,
					2002						2001
					Average Balance		Rate		Interest Income or Expense		Average Balance		Rate		Interest Income or Expense
					(dollars in millions)
Assets
Interest-earning assets:
	Federal funds sold and securities purchased under resale agreements				$	2,289	1.77	%	$	31	$	273	5.83	%	$	12
	AFS securities⁽¹⁾:
		MBS				24,199	5.62			1,019		44,882	7.08			2,384
		Investment securities				37,301	4.98			1,392		9,818	5.61			413
	Loans⁽²⁾⁽³⁾:
		SFR				110,564	5.88			4,874		96,775	7.24			5,254
		Specialty mortgage finance⁽⁴⁾				10,867	9.36			763		8,756	9.96			655

			Total SFR			121,431	6.19			5,637		105,531	7.47			5,909
		SFR construction⁽⁵⁾				2,290	6.74			116		2,744	8.39			173
		Second mortgage and other consumer:
			Banking subsidiaries			15,773	6.66			786		9,395	8.61			605
			Washington Mutual Finance			2,584	16.44			318		2,544	16.54			316
		Commercial business				5,204	5.58			219		4,670	7.67			270
		Commercial real estate:
			Multi-family			17,699	6.08			808		16,675	7.95			995
			Other commercial real estate			6,859	6.61			341		4,528	8.08			275

				Total loans		171,840	6.38			8,225		146,087	7.80			8,543
	Other					4,624	6.17			214		4,053	6.17			188

				Total interest-earning assets		240,253	6.04			10,881		205,113	7.50			11,540
Noninterest-earning assets:
	MSR					6,918						4,858
	Goodwill					5,759						1,825
	Other					17,761						10,150

			Total assets		$	270,691					$	221,946

Liabilities
Interest-bearing liabilities:
	Deposits:
		Interest-bearing checking			$	35,873	2.65			711	$	6,408	1.35			65
		Savings accounts and MMDAs				33,357	1.49			372		36,772	3.47			954
		Time deposit accounts				38,628	3.13			905		35,698	5.34			1,426

			Total interest-bearing deposits			107,858	2.46			1,988		78,878	4.14			2,445
	Federal funds purchased and commercial paper					3,690	1.73			48		4,685	4.76			166
	Repurchase agreements					38,595	2.21			638		29,550	4.63			1,024
	Advances from FHLBs					60,595	2.78			1,262		63,698	5.06			2,410
	Other					13,892	5.10			530		12,929	6.68			646

				Total interest-bearing liabilities		224,630	2.66			4,466		189,740	4.72			6,691

Noninterest-bearing sources:
	Noninterest-bearing deposits					22,175						15,248
	Other liabilities					4,299						4,150
Stockholders' equity						19,587						12,808

				Total liabilities and stockholders' equity	$	270,691					$	221,946

Net interest spread and net interest income							3.38		$	6,415			2.78		$	4,849

Impact of noninterest-bearing sources							0.17						0.36
Net interest margin							3.55						3.14

⁽¹⁾: Yield is based on average amortized cost balances.
⁽²⁾: Nonaccrual loans were included in the average loan amounts outstanding.
⁽³⁾: Interest income for loans includes amortization of net deferred loan origination costs of $154 million and $117 million for the nine months ended September 30, 2002 and 2001.
⁽⁴⁾: Includes purchased subprime loans as well as first mortgages originated by Washington Mutual Finance and Long Beach Mortgage.
⁽⁵⁾: Includes loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale, and loans made directly to the intended occupant of a single-family residence.

Noninterest Income

Noninterest income consisted of the following:

			Three Months Ended September 30,								Nine Months Ended September 30,
			2002			2001			Percentage Change		2002			2001			Percentage Change
			(dollars in millions)
Depositor and other retail banking fees			$	426		$	333		28	%	$	1,185		$	937		26	%
Securities fees and commissions				92			78		18			272			226		20
Insurance income				46			22		109			132			65		103
SFR mortgage banking (expense) income⁽¹⁾:
	Loan servicing fees			508			425		20			1,609			928		73
	Loan subservicing fees			34			11		209			87			15		480
	Amortization of MSR			(713	)		(293	)	143			(1,696	)		(624	)	172
	Impairment adjustment			(1,849	)		(554	)	234			(2,911	)		(692	)	321
	Other, net			(97	)		(44	)	120			(238	)		(104	)	129

		Net SFR loan servicing (expense) income		(2,117	)		(455	)	365			(3,149	)		(477	)	560
	Loan related income			125			44		184			326			107		205
	Gain from mortgage loans			418			275		52			889			677		31
	(Loss) gain from sale of originated MBS			(1	)		5		–			19			100		(81	)

		Total SFR mortgage banking (expense) income		(1,575	)		(131	)	–			(1,915	)		407		–
Portfolio loan related income				85			49		73			226			134		69
Gain from other AFS securities				356			253		41			195			209		(7	)
Revaluation gain (loss) from derivatives				1,582			(2	)	–			2,423			(4	)	–
Gain on extinguishment of repurchase agreements				98			125		(22	)		293			125		134
Net settlement income from certain interest-rate swaps				116			–		–			224			–		–
Other income				154			136		13			361			319		13

		Total noninterest income	$	1,380		$	863		60		$	3,396		$	2,418		40

⁽¹⁾: Does not include interest income on loans held for sale or the effect of custodial/escrow deposits on net interest income.

SFR Mortgage Banking (Expense) Income

The increase in SFR loan servicing fees for the three and nine months ended September 30, 2002 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 $376,248 million at September 30, 2001 to $478,275 million at September 30, 2002 primarily as a result of our strong levels of salable SFR loan volume, in which we retain the servicing relationship. The strong SFR loan volume was primarily due to high refinancing volume, which was caused by very low mortgage rates.

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

		September 30, 2002
		Unpaid Principal Balance		Weighted Average Servicing Fee
		(in millions)		(in basis points, annualized)
Government		$	67,969	54
Agency			308,467	35
Private			90,791	48
Specialty home loans			11,048	50

	Total loans serviced for others portfolio	$	478,275	40

The decrease in the weighted average servicing fee from 44 basis points at September 30, 2001 to 40 basis points at September 30, 2002 was primarily due to sales of excess servicing during the second and third quarters, which decreased the net MSR balance by $822 million but had no impact on the unpaid principal balance of the loans serviced for others portfolio.

A continued decrease in long-term mortgage rates during the third quarter led to higher anticipated prepayment rates, which resulted in MSR impairment of $1,849 million and $2,911 million for the three and nine months ended September 30, 2002, increasing the MSR impairment reserve to $4,320 million as of September 30, 2002. Continued high volumes of actual prepayment activity during the third quarter of 2002, coupled with the growth in the MSR servicing portfolio, resulted in higher MSR amortization, as compared with the third quarter of 2001.

In measuring the impairment of MSR, we stratify the loans in our servicing portfolio based on loan type, coupon rate and other predetermined characteristics. 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 carrying value. At September 30, 2002, we stratified the loans in our servicing portfolio as follows:

		September 30, 2002
		Rate Band	Gross Book Value		Valuation Allowance		Net Book Value		Fair Value
		(in millions)
ARMs		All loans	$	1,389	$	320	$	1,069	$	1,069
Conventional		0.00% to 7.49%		3,595		1,830		1,765		1,765
Conventional		7.50% to 8.99%		981		630		351		351
Conventional		9.00% and above		28		–		28		31
Government		0.00% to 7.49%		922		477		445		445
Government		7.50% to 8.99%		705		366		339		339
Government		9.00% and above		49		17		32		32
Private		0.00% to 7.49%		680		433		247		247
Private		7.50% to 8.99%		322		196		126		126
Private		9.00% and above		22		3		19		19

	Primary Servicing			8,693		4,272		4,421		4,424
Master servicing		All loans		119		48		71		72
Specialty home loans		All loans		49		–		49		67
Multi-family		All loans		7		–		7		9

	Total		$	8,868	$	4,320	$	4,548	$	4,572

The value of our MSR asset is subject to prepayment risk. Future expected net cash flows from servicing a loan in our servicing portfolio will not be realized if the loan pays off earlier than anticipated. Moreover, since most loans within our servicing portfolio do not contain penalty provisions for early payoff, we will not receive a corresponding economic benefit if the loan pays off earlier than expected. MSR are the discounted present value of the future net cash flows we expect to receive from our servicing portfolio. Accordingly, prepayment risk subjects our MSR to impairment risk.

We estimate fair value of each MSR stratum using a discounted cash flow ("DCF") model, independent third-party appraisals and management's analysis of observable data to formulate conclusions about anticipated changes in future market conditions, including interest rates. The DCF model estimates the present value of the future net cash flows of the servicing portfolio based on various factors, such as servicing costs, expected prepayment speeds and discount rates, about which management must make assumptions based on future expectations. The reasonableness of management's assumptions about these factors is confirmed through independent broker surveys. Independent appraisals of the fair value of our servicing portfolio are obtained periodically, but not less frequently than annually, and are used by management to evaluate the reasonableness of the value conclusions. At September 30, 2002, key economic assumptions and the sensitivity of the current fair value for SFR MSR to immediate changes in those assumptions were as follows:

		September 30, 2002
		Mortgage Servicing Rights
		Adjustable-Rate Loans			Fixed-Rate Loans
		(dollars in millions)
Fair value of SFR MSR		$	1,069		$	3,355
Expected weighted-average life (in years)			3.91			3.03
Constant prepayment rate⁽¹⁾			22.63	%		31.56	%
	Impact on fair value of 25% decrease	$	206		$	1,014
	Impact on fair value of 50% decrease		502			2,514
	Impact on fair value of 100% increase		(512	)		(2,010	)
	Impact on fair value of 200% increase		(738	)		(2,444	)
Future cash flows discounted at			10.02	%		8.80	%
	Impact on fair value of 25% decrease	$	85		$	179
	Impact on fair value of 50% decrease		189			387
	Impact on fair value of 25% increase		(72	)		(156	)
	Impact on fair value of 50% increase		(132	)		(294	)

⁽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 2001 Annual Report on Form 10-K for further discussion of how MSR impairment is measured.

Loan related income increased during the three and nine months ended September 30, 2002 primarily due to increased late charges on the loans serviced for others and income related to Government National Mortgage Association ("GNMA") advances and pool buy-outs.

The continuing high volume of refinancing activity allowed us to generate strong levels of salable SFR loan volume in the third quarter. Additionally, the Company enters into commitments to originate loans whereby the interest rate on the loan is determined 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 with changes in fair value recorded in gain from mortgage loans. The fair value of the rate lock commitments is predominantly determined by the value of the anticipated servicing income which is calculated using the same valuation methodologies as the Company's MSR. Rate lock commitment volume totaled $69,309 million and $153,631 million for the three and nine months ended September 30, 2002, compared with $37,592 million and $83,515 million for the same periods in 2001. The combined effect of the high levels of salable SFR loan and rate lock commitment volume resulted in gain from mortgage loans of $418 million and $889 million during the three and nine months ended September 30, 2002 compared to $275 million and $677 million during the same periods in 2001.

For MSR risk management purposes, the Company has decreased its reliance on investment securities by shifting to a blend of investment securities, interest rate contracts and forward purchase commitments. The following table shows the impact of the MSR risk management activities on the following components of noninterest income for the three months ended September 30, 2002.

		MSR Risk Management		Asset/Liability Risk Management			Total
		(in millions)
Gain (loss) from other AFS securities		$	388	$	(32	)	$	356
Revaluation gain (loss) from derivatives			1,694		(112	)		1,582
Gain (loss) on extinguishment of repurchase agreements			136		(38	)		98
Net settlement income from certain interest-rate swaps			116		–			116

	Total	$	2,334	$	(182	)	$	2,152

Gain from sale of originated MBS during the nine months ended September 30, 2001 included gains from the sale of adjustable-rate mortgage ("ARM") loans that were securitized in the fourth quarter of 2000 and other MBS that were securitized in earlier periods.

All Other Noninterest Income Analysis

The increase in depositor and other retail banking fees for the three and nine months ended September 30, 2002 was primarily due to higher levels of overdraft fees that resulted from an increased number of noninterest-bearing checking accounts in comparison with the three and nine months ended September 30, 2001. The number of these accounts at September 30, 2002 totaled 5,662,471, an increase of more than 849,000 from September 30, 2001. This increase included approximately 200,000 noninterest-bearing checking accounts acquired from Dime during the first quarter of 2002.

Securities fees and commissions increased during the three and nine months ended September 30, 2002, substantially due to an increase in sales of fixed annuities.

Insurance income increased during the three and nine months ended September 30, 2002 largely due to the continued growth in our captive reinsurance programs. The Dime acquisition also contributed to an increase in revenues in optional insurance and property and casualty insurance products.

A majority of the growth in portfolio loan related income for the three and nine months ended September 30, 2002 was due to increased late charges on the loan portfolio, continued high loan prepayment fees as a result of refinancing activity and the Dime acquisition.

Noninterest Expense

Noninterest expense consisted of the following:

		Three Months Ended September 30,							Nine Months Ended September 30,
		2002			2001		Percentage Change		2002			2001		Percentage Change
		(dollars in millions)
Compensation and benefits		$	719		$	507	42	%	$	2,141		$	1,389	54	%
Occupancy and equipment			289			202	43			859			576	49
Telecommunications and outsourced information services			136			111	23			409			322	27
Depositor and other retail banking losses			55			37	49			153			99	55
Amortization of goodwill			–	⁽¹⁾		31	(100	)		–	⁽¹⁾		76	(100	)
Amortization of other intangible assets			25			17	47			77			51	51
Advertising and promotion			75			52	44			188			135	39
Postage			50			37	35			136			98	39
Professional fees			55			51	8			161			139	16
Loan expense			65			34	91			154			73	111
Travel and training			31			35	(11	)		102			83	23
Other expense			125			40	213			370			245	51

	Total noninterest expense	$	1,625		$	1,154	41		$	4,750		$	3,286	45

⁽¹⁾: The Company adopted SFAS No. 142 on January 1, 2002, and no longer amortizes goodwill.

The increase in employee base compensation and benefits expense for the three and nine months ended September 30, 2002 over the same periods a year ago was primarily due to the acquisitions of Dime and HomeSide and the hiring of additional staff to support our expanding operations. Full-time equivalent employees ("FTE") were 50,329 at September 30, 2002 compared with 37,830 at September 30, 2001. The Dime and HomeSide acquisitions added a total of approximately 9,000 FTE.

The increase in occupancy and equipment expense for the three and nine months ended September 30, 2002 resulted primarily from properties and equipment acquired from recent acquisitions.

The increase in telecommunications and outsourced information services expense for the three and nine months ended September 30, 2002 was primarily attributable to higher usage of voice and data network services, outsourced data processing services and internet services. Additionally, the Company added 30 and 181 financial centers during the three and nine months ended September 30, 2002 as a result of acquisitions and the opening of Occasio™ (Occasio is a trademark of the Company) financial centers in new and existing markets, which also contributed to higher telecommunications expense. WorldCom, Inc. is a supplier of telecommunications services to the Company under the terms of a multi-year contract and has not taken action in its bankruptcy proceedings to either affirm or reject the contract.

The increase in depositor and other retail banking losses in the periods reported was primarily due to higher loss levels per account as a result of increases in forgeries and returned deposited items.

The increase in amortization of other intangible assets expense during the periods reported was substantially due to the core deposit intangible acquired in the Dime acquisition. Effective October 1, 2002 and in accordance with the adoption of SFAS No. 147 on that date, the Company ceased amortization of unidentifiable intangible assets related to acquired branches.

Advertising and promotion expense increased for the periods reported primarily due to the marketing campaign in the New York metropolitan area.

The increase in loan expense for the three and nine months ended September 30, 2002 was mostly due to higher non-deferred loan closing costs, which were attributable to an overall increase in loan originations and purchases, and higher mortgage payoff expenses.

Travel and training for the three months ended September 30, 2002 decreased slightly due to a reduction in travel and training related to merger activities. However, travel and training for the nine months ended September 30, 2002 increased primarily due to increased travel related to the Dime and HomeSide acquisitions and the training of new and recently transferred employees during the first half of the year.

A significant portion of the increase in other expense during the periods reported was due to increases in foreclosed assets, regulatory assessments, outside printing services, business taxes, office supplies and higher reinsurance management fees.

Review of Financial Condition

Assets. At September 30, 2002, our assets were $262,605 million, an increase of 8% from $242,506 million at December 31, 2001. The increase was predominantly attributable to the Dime and HomeSide acquisitions.

Securities. Securities consisted of the following:

				September 30, 2002
				Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
				(in millions)
Available-for-sale securities
Investment securities:
	U.S. Government and agency			$	18,419	$	1,201	$	–		$	19,620
	Other securities				332		15		(2	)		345
	Equity securities				132		2		(1	)		133

		Total investment securities			18,883		1,218		(3	)		20,098
MBS:
	U.S. Government and agency				18,832		648		(7	)		19,473
	Private issue				6,848		193		(20	)		7,021

		Total MBS securities			25,680		841		(27	)		26,494

			Total available-for-sale securities	$	44,563	$	2,059	$	(30	)	$	46,592

				December 31, 2001
				Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
				(in millions)
Available-for-sale securities
Investment securities:
	U.S. Government and agency			$	30,459	$	41	$	(1,143	)	$	29,357
	Other securities				256		5		(3	)		258
	Equity securities				171		2		(7	)		166

		Total investment securities			30,886		48		(1,153	)		29,781
MBS:
	U.S. Government and agency				17,780		441		(23	)		18,198
	Private issue				10,117		264		(11	)		10,370

		Total MBS securities			27,897		705		(34	)		28,568

			Total available-for-sale securities	$	58,783	$	753	$	(1,187	)	$	58,349

		Three Months Ended September 30,						Nine Months Ended September 30,
		2002			2001			2002			2001
		(in millions)
Available-for-sale securities
Realized gross gains		$	607		$	275		$	888		$	377
Realized gross losses			(252	)		(17	)		(674	)		(68	)

	Realized net gain (loss)	$	355		$	258		$	214		$	309

Our MBS portfolio declined $2,074 million to $26,494 million at September 30, 2002 from $28,568 million at December 31, 2001. This decrease was predominantly related to high prepayment activity and sales during the first nine months of 2002, partially offset by purchases of MBS and loans securitized and retained as MBS. Other investment securities decreased $9,683 million to $20,098 million at September 30, 2002 from $29,781 million at December 31, 2001 which was primarily related to the sales of fixed-rate U.S. Government agency and treasury bonds.

Loans. Loans held in portfolio consisted of the following:

			September 30, 2002		December 31, 2001
			(in millions)
SFR			$	87,773	$	82,021
Specialty mortgage finance⁽¹⁾				10,866		9,821

	Total SFR loans			98,639		91,842
SFR construction:
	Builder⁽²⁾			1,159		1,623
	Custom⁽³⁾			915		979
Second mortgage and other consumer:
	Banking subsidiaries			16,848		10,462
	Washington Mutual Finance			2,695		2,586
Commercial business				5,385		5,390
Commercial real estate:
	Multi-family			18,408		15,608
	Other commercial real estate			6,881		4,501

		Total loans held in portfolio	$	150,930	$	132,991

⁽¹⁾: Includes purchased subprime loan portfolios as well as first mortgages originated by Washington Mutual Finance.
⁽²⁾: Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale.
⁽³⁾: Represents construction loans made directly to the intended occupant of a single-family residence.

Substantially all of the increase in loans held in portfolio was a result of high volumes of loan originations and purchases coupled with loans added through the Dime acquisition, partially offset by loan payments.

Loan volume was as follows:

			Three Months Ended September 30,				Nine Months Ended September 30,
			2002		2001		2002		2001
			(in millions)
SFR:
	ARMs		$	25,928	$	9,120	$	58,629	$	24,333
	Fixed rate			38,323		30,781		108,553		68,258
	Specialty mortgage finance⁽¹⁾			3,370		3,186		10,048		8,406

		Total SFR loan volume		67,621		43,087		177,230		100,997
SFR construction:
	Builder⁽²⁾			567		86		1,452		1,813
	Custom⁽³⁾			214		200		567		757
Second mortgage and other consumer:
	Banking subsidiaries			3,554		2,280		11,186		5,780
	Washington Mutual Finance			496		499		1,484		1,453
Commercial business				533		573		1,774		2,148
Commercial real estate:
	Multi-family			1,870		580		3,976		1,982
	Other commercial real estate			628		145		1,280		783

		Total loan volume	$	75,483	$	47,450	$	198,949	$	115,713

⁽¹⁾: Includes purchased subprime loan portfolios as well as first mortgages originated by Washington Mutual Finance and Long Beach Mortgage.
⁽²⁾: Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale.
⁽³⁾: Represents construction loans made directly to the intended occupant of a single-family residence.

Loan volume by channel was as follows:

		Three Months Ended September 30,				Nine Months Ended September 30,
		2002		2001		2002		2001
		(in millions)
Originated		$	52,020	$	27,022	$	135,225	$	76,783
Purchased/Correspondent			23,463		20,428		63,724		38,930

	Total loan volume by channel	$	75,483	$	47,450	$	198,949	$	115,713

Refinancing activity⁽¹⁾ was as follows:

		Three Months Ended September 30,				Nine Months Ended September 30,
		2002		2001		2002		2001
		(in millions)
SFR:
	ARMs	$	19,681	$	6,937	$	44,413	$	16,677
	Fixed rate		25,653		18,805		68,170		42,990
SFR construction			12		7		40		23
Second mortgage and other consumer			584		84		1,912		225
Commercial real estate			391		326		1,250		903

Total refinances		$	46,321	$	26,159	$	115,785	$	60,818

⁽¹⁾: Includes loan refinancings entered into by both new and pre-existing loan customers.

Loan volume increased during the three and nine months ended September 30, 2002 due largely to higher refinancing activity. Purchased/correspondent loans increased during the nine months ended September 30, 2002 due to the expansion of our correspondent lending activities, which primarily resulted from the acquisition of Dime, Fleet and HomeSide. Purchased/correspondent volume for specialty mortgage finance loans was $1.27 billion and $4.09 billion for the three and nine months ended September 30, 2002, compared with $1.61 billion and $4.02 billion for the three and nine months ended September 30, 2001. Although we expect total loan volume to increase in the fourth quarter of 2002, the amount of growth is likely to be constrained by operational capacity limitations.

Other Assets. Other assets consisted of the following:

		September 30, 2002		December 31, 2001
		(in millions)
Premises and equipment		$	2,600	$	1,999
Investment in bank-owned life insurance			1,923		1,535
Accrued interest receivable			1,109		1,417
Foreclosed assets			309		228
GNMA advances and pool buy-outs			4,151		1,849
Other intangible assets			498		349
Derivatives			3,757		745
Other			4,067		2,467

	Total other assets	$	18,414	$	10,589

GNMA advances and pool buy-outs consist of advances made to GNMA mortgage pools for delinquent loans and certain foreclosure costs and loans repurchased from GNMA mortgage pools. Subsequent to September 30, 2002, the Company recorded the GNMA mortgage loans which are currently eligible for repurchase, as GNMA pool buy-outs as of September 30, 2002. The total impact of this change was to increase other assets by $1,504 million with a corresponding increase in other liabilities.

Advances made to buy out government agency-guaranteed loans pursuant to the Company's servicing agreements are referred to as "operational buy-outs" by the Company. The Company, on behalf of the Federal Housing Administration and the Department of Veterans Affairs, undertakes the collection and foreclosure process. After the foreclosure process is complete, the Company is reimbursed for most of the principal and interest advances to security holders and a majority of the administrative costs of the foreclosure. The Company has recorded a valuation allowance to provide for the unreimbursed portion of

these advances and administrative costs of $64 million at September 30, 2002, compared with $42 million at December 31, 2001.

In addition to operational buy-outs, the Company has the ability to repurchase certain GNMA loans that have missed one payment within the last four consecutive months. When such loans are repurchased, they are typically sold to private investors during the month of repurchase. On November 6, 2002, GNMA changed its policy governing the repurchase of loans from mortgage pools, which will be effective for mortgage pools issued after January 1, 2003. This revised policy will no longer allow the Company to repurchase pooled loans when at least one missed payment remains uncured for four consecutive months. The Company will continue to be allowed, however, to repurchase pooled loans when no payments are received for three consecutive months. The Company does not expect this change to have a significant impact on its results of operations or financial condition.

The increase in the derivatives balance from December 31, 2001 to September 30, 2002 was primarily due to increases in the fair value of MSR risk management derivatives.

Deposits. Deposits consisted of the following:

			September 30, 2002		December 31, 2001
			(in millions)
Checking accounts:
	Interest bearing		$	50,301	$	15,295
	Noninterest bearing			26,812		22,441

				77,113		37,736
Savings accounts				10,357		6,970
MMDAs				19,442		25,514
Time deposit accounts				33,696		36,962

		Total deposits	$	140,608	$	107,182

Deposits increased to $140,608 million at September 30, 2002 from $107,182 million at December 31, 2001. As a result of the acquisition of Dime, we added $15.17 billion in deposits. At September 30, 2002, total deposits included $16.02 billion in custodial/escrow deposits related to loan servicing activities, compared with $10.11 billion at December 31, 2001. Time deposit accounts decreased by $9.37 billion from year-end 2001, primarily as a result of decreases in liquid certificates of deposit and the Institutional Certificate of Deposit program, substantially offset by the addition of $6.10 billion of time deposit accounts included in the Dime acquisition.

Checking accounts, savings accounts and MMDAs ("transaction deposits") increased to 76% of total deposits at September 30, 2002, compared with 66% at year-end 2001. These products generally have the benefit of lower interest costs, compared with time deposit accounts. Even though transaction deposits are more liquid, we consider them to be the core relationship with our customers. A majority of the increase in interest-bearing checking accounts was due to the growth in Platinum Checking deposits, which increased from $9.40 billion at December 31, 2001 to $44.36 billion at September 30, 2002. During the three and nine months ended September 30, 2002, the number of Platinum Checking accounts increased by over 118,000 and 466,000. At September 30, 2002, deposits funded 54% of total assets, compared with 44% at year-end 2001.

Borrowings. Our borrowings primarily take the form of repurchase agreements and advances from the Federal Home Loan Banks 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.

Other borrowings increased by $839 million during the first nine months of 2002 primarily due to the issuance of senior and subordinated debt, and trust preferred income securities acquired from Dime. Refer to "Liquidity" for further discussion of funding sources.

Off-Balance Sheet Activities

In the ordinary course of business, we routinely securitize and sell residential mortgage loans, and from time to time, commercial mortgage loans into the secondary market. In general, these securitizations are structured without recourse to the Company. As part of non-agency securitizations, we use qualifying special purpose entities ("QSPE") to facilitate the transfer of mortgage loans into the secondary market. These entities are not consolidated within our financial statements since they satisfy the criteria required by SFAS No. 140, Accounting for the Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. In general, these criteria require the QSPE to be demonstrably distinct 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.

The Company has not used unconsolidated special purpose entities as a mechanism to remove nonaccrual loans and foreclosed assets from the balance sheet.

Asset Quality

Nonaccrual Loans, Foreclosed Assets and Restructured Loans

Loans are generally placed on nonaccrual status when they are four payments 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.

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

				September 30, 2002			June 30, 2002			December 31, 2001
				(dollars in millions)
Nonaccrual loans:
	SFR			$	1,068		$	1,092		$	974
	Specialty mortgage finance⁽¹⁾				426			420			358

			Total SFR nonaccrual loans		1,494			1,512			1,332
	SFR construction:
		Builder⁽²⁾			48			44			26
		Custom⁽³⁾			6			8			10
	Second mortgage and other consumer:
		Banking subsidiaries			61			66			64
		Washington Mutual Finance			92			88			84
	Commercial business				186			177			159
	Commercial real estate:
		Multi-family			58			65			56
		Other commercial real estate			243			272			299

			Total nonaccrual loans		2,188			2,232			2,030
Foreclosed assets					309			274			228

			Total nonperforming assets	$	2,497		$	2,506		$	2,258
			As a percentage of total assets		0.95	%		0.96	%		0.93	%
Restructured loans				$	112		$	119		$	118

			Total nonperforming assets and restructured loans	$	2,609		$	2,625		$	2,376

⁽¹⁾: Includes purchased subprime loans as well as first mortgages originated by Washington Mutual Finance.
⁽²⁾: Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale.
⁽³⁾: Represents construction loans made directly to the intended occupant of a single-family residence.

Nonaccrual loans decreased to $2,188 million at September 30, 2002 from $2,232 million at June 30, 2002 but remain $158 million above the balance at December 31, 2001. Of the increase in nonaccrual loans during the nine months ended September 30, 2002, approximately $102 million was attributable to loans acquired in connection with the Dime acquisition. These Dime originated nonaccrual loans are concentrated in SFR as well as the commercial business and commercial real estate loan categories.

Nonaccrual loans held for sale, which are excluded from the nonaccrual balances presented above, were $105 million, $114 million and $123 million at September 30, 2002, June 30, 2002 and December 31, 2001. Loans held for sale are accounted for at lower of aggregate cost or market value ("LOCOM"), with valuation changes included as adjustments to gain from mortgage loans.

SFR nonaccrual loans (excluding specialty mortgage finance) of $1,068 million decreased by $24 million during the three months ended September 30, 2002, but represent a $94 million increase from December 31, 2001. Of the increase, $55 million represents loans acquired through the Dime acquisition. Total SFR nonaccrual loans declined during the three months ended September 30, 2002 due in part to the continued strength in the housing market.

Specialty mortgage finance nonaccrual loans increased $6 million and $68 million for the three and nine months ended September 30, 2002 to $426 million, reflecting a moderate increase in delinquencies and growth in the portfolio.

At September 30, 2002, commercial business nonaccrual loans represented 3.5% of total commercial business loans, compared with 2.9% at December 31, 2001, reflecting the overall weakening of U.S. business economic conditions. Small business and Small Business Administration ("SBA") nonaccrual loans both decreased from June 30, 2002, while nonaccrual loans to finance franchise-oriented businesses increased $32 million during the three months ended September 30, 2002 to $68 million.

The multi-family loan portfolio comprises 73% of all commercial real estate loans at September 30, 2002. This portfolio continues to experience a strong and stable performance with nonaccrual loans in this category representing 0.32% of total multi-family loans at September 30, 2002, compared with 0.37% at June 30, 2002, and 0.36% at December 31, 2001.

Other commercial real estate nonaccrual loans decreased by $29 million and $56 million during the three and nine months ended September 30, 2002 to $243 million. Declines during the nine months ended September 30, 2002 are primarily due to transfers to foreclosed assets and charge-offs on nonaccrual loans.

At September 30, 2002, foreclosed assets totaled $309 million, compared with $274 million at June 30, 2002 and $228 million at December 31, 2001. The $81 million increase in foreclosed assets since December 31, 2001 resulted from the natural progression of delinquent loans to foreclosure following the increase in real estate nonaccruals in early 2002.

Provision and Allowance for Loan and Lease Losses

When available information confirms that specific loans or portions thereof are uncollectible, these amounts are charged off against the allowance for loan and lease losses. The existence of some or all of the following criteria will generally confirm that a loss has been incurred: the loan is significantly delinquent and the borrower has not evidenced the ability or intent to bring the loan current; the Company has no recourse to the borrower, or if it does, the borrower has insufficient assets to pay the debt; or the fair value of the loan collateral is significantly below the current loan balance and there is little or no near-term prospect for improvement. Consumer loans secured by collateral other than real estate are charged off if and when they exceed a specified number of days contractually delinquent (120 days for substantially all loans). Single-family residential loans and consumer loans secured by real estate are written down to the fair value of the underlying collateral (less projected cost to sell) when they are contractually delinquent 180 days.

After considering the uncertain economic climate, growth in the commercial and specialty mortgage finance loan portfolios, and relatively high levels of nonaccrual loans, a $135 million provision for loan and lease losses was recorded in the third quarter of 2002. The provision exceeded net charge-offs by

$47 million during the quarter. As a percentage of average loans held in portfolio, annualized net charge-offs were 0.24% and 0.26% for the three and nine months ended September 30, 2002, compared with 0.22% and 0.21% for the same periods in 2001. Net charge-offs were $88 million and $303 million for the three and nine months ended September 30, 2002, compared with $75 million and $208 million for the same periods in 2001.

The allowance for loan and lease losses represents management's estimate of credit losses inherent in our loan and lease portfolios as of the balance sheet date. Management performs regular reviews in order to identify these inherent losses and to assess the overall collection probability for these portfolios. This process provides an allowance that consists of two components: allocated and unallocated. To arrive at the allocated component, we combine estimates of the allowance needed for loans that are evaluated collectively, such as single-family residential and specialty mortgage finance, and loans that are analyzed individually, such as commercial business and commercial real estate.

The determination of the allocated component for loans that are evaluated collectively involves the monitoring of delinquency, default and loss rates (among other factors that determine portfolio risk) and an assessment of current economic conditions, particularly in geographic areas where we have significant concentrations. Loss factors are based on the analysis of the historical performance of each loan category and an assessment of portfolio trends and conditions, as well as specific risk factors impacting the loan and lease portfolios. These factors are then applied to the collective total of the loan balances and commitments.

Loans within the commercial business, commercial real estate and builder single-family residential construction categories are reviewed on an individual basis and loss factors are applied based on the risk rating assigned to the loan. A specific allowance, which is part of the allocated component, may be assigned on these loan types if they have been individually determined to be impaired. Loans are considered impaired when it is probable that we will be unable to collect all amounts contractually due as scheduled, including contractual interest payments. For loans that are determined to be impaired, the amount of impairment is measured by a discounted cash flow analysis, using the loan's effective interest rate, except when it is determined that the only source of repayment for the loan is the operation or liquidation of the underlying collateral. In such cases, the current fair value of the collateral, reduced by estimated disposal costs, will be used in place of discounted cash flows. In estimating the fair value of collateral, we evaluate various factors, such as occupancy and rental rates in our real estate markets and the level of obsolescence that may exist on assets acquired from commercial business loans.

In estimating the amount of credit losses inherent in our loan and lease portfolios, various judgments and assumptions are made. For example, when assessing the condition of the overall economic environment, assumptions are made regarding future market conditions and their impact on the loan and lease portfolios. In the event the national economy were to sustain a prolonged downturn, the loss factors applied to our portfolios may need to be revised, which may significantly impact the measurement of the allowance for loan and lease losses. For impaired loans that are collateral- dependent, the estimated fair value of the collateral may deviate significantly from the proceeds received when the collateral is sold. To mitigate the imprecision inherent in most estimates of expected credit losses, the allocated component of the allowance is supplemented by an unallocated component. The unallocated component reflects our judgmental assessment of the impact that various factors may have on the overall measurement of credit losses. These factors include, but are not limited to, general economic and business conditions affecting the key lending areas of the Company, credit quality and collateral value trends, loan concentrations, specific industry conditions within portfolio segments, recent loss experience in particular segments of the portfolio, duration of the current business cycle, regulatory examination results and findings of the Company's internal credit review function.

Refer to Note 1 to the Consolidated Financial Statements – "Summary of Significant Accounting Policies" in our 2001 Annual Report on Form 10-K for further discussion of the Allowance for Loan and Lease Losses.

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

				Three Months Ended September 30,						Nine Months Ended September 30,
				2002			2001			2002			2001
				(dollars in millions)
Balance, beginning of period				$	1,665		$	1,170		$	1,404		$	1,014
Allowance acquired through business combinations/other					(7	)		–			134			114
Provision for loan and lease losses					135			200			470			375

					1,793			1,370			2,008			1,503
Loans charged off:
	SFR				(9	)		(6	)		(31	)		(27	)
	Specialty mortgage finance⁽¹⁾				(9	)		(4	)		(27	)		(16	)

			Total SFR charge-offs		(18	)		(10	)		(58	)		(43	)
	Second mortgage and other consumer:
		Banking subsidiaries			(22	)		(12	)		(65	)		(40	)
		Washington Mutual Finance			(44	)		(36	)		(133	)		(103	)
	Commercial business				(22	)		(19	)		(93	)		(35	)
	Commercial real estate:
		Multi-family			(1	)		–			(2	)		–
		Other commercial real estate			(2	)		(5	)		(9	)		(10	)

			Total loans charged off		(109	)		(82	)		(360	)		(231	)
Recoveries of loans previously charged off:
	SFR				2			–			2			2
	Second mortgage and other consumer:
		Banking subsidiaries			3			1			9			4
		Washington Mutual Finance			5			5			15			14
	Commercial business				10			1			29			2
	Commercial real estate:
		Multi-family			1			–			1			–
		Other commercial real estate			–			–			1			1

			Total recoveries of loans previously charged off		21			7			57			23

		Net charge-offs			(88	)		(75	)		(303	)		(208	)

Balance, end of period				$	1,705		$	1,295		$	1,705		$	1,295

Net charge-offs (annualized) as a percentage of average loans held in portfolio					0.24	%		0.22	%		0.26	%		0.21	%
Allowance as a percentage of total loans held in portfolio					1.13			0.97			1.13			0.97

⁽¹⁾: Includes purchased subprime loans as well as first mortgages originated by Washington Mutual Finance.

Operating Segments

We manage our business along three major operating segments: Banking and Financial Services, Home Loans and Insurance Services, and Specialty Finance. 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

Net income was $435 million and $1,162 million for the three and nine months ended September 30, 2002, up from $228 million and $658 million for the same periods a year ago. Net interest income was

$967 million and $2,617 million for the three and nine months ended September 30, 2002, up $416 million or 75% and $958 million or 58% from $551 million and $1,659 million for the three and nine months ended September 30, 2001. These increases in net interest income are substantially due to the increase in interest income on consumer loans as well as decreases in interest expense on deposits and the funding costs for assets and a higher funding credit that resulted from growth in average total deposit balances. Noninterest income increased to $563 million and $1,614 million during the three and nine months ended September 30, 2002 from $482 million and $1,312 million for the same periods in 2001. The increases in noninterest income were predominantly due to the increase in depositor and other retail banking fees associated with higher collections of overdraft fees as well as increased service fees on existing and new checking accounts. The number of checking accounts increased by 17.6% since September 30, 2001.

Noninterest expense increased to $783 million and $2,215 million during the three and nine months ended September 30, 2002, compared with $628 million and $1,803 million for the same periods in 2001. These increases were driven primarily by increases in compensation and benefits expense, occupancy and equipment, as well as increased advertising and promotion expenses related to the conversion of the branches acquired from Dime.

Total assets increased by 32% from December 31, 2001, primarily due to the growth in the consumer loan portfolio resulting from a high volume of originations. Total deposits increased by 37% from December 31, 2001, substantially due to the growth in checking accounts as well as the Dime acquisition.

Home Loans and Insurance Services

Segment results for the Home Loans and Insurance Services Group were significantly impacted by the addition of the mortgage operations of Dime, HomeSide, and Fleet.

Net income was $804 million and $1,748 million for the three and nine months ended September 30, 2002, up from $276 million and $844 million for the same periods in 2001. Net interest income was $997 million and $2,760 million during the three and nine months ended September 30, 2002, up from $443 million and $1,410 million during the same periods in 2001 primarily due to a decrease in funding costs that resulted from lower interest rates.

Noninterest income increased to $969 million and $1,965 million during the three and nine months ended September 30, 2002, compared with $409 million and $1,017 million for the same periods a year ago. The increases were due to a number of factors including increases in revaluation gain from derivatives, gain from securities, gain from mortgage loans, gain on extinguishment of repurchase agreements, net settlement income from certain interest-rate swaps, other operating income and insurance income. These increases were substantially offset by increases in impairment and amortization expense associated with MSR.

Noninterest expense rose to $619 million and $1,724 million for the three and nine months ended September 30, 2002 from $333 million and $851 million for the comparable periods in 2001. The increases were largely due to higher compensation and benefits expense, particularly as it relates to temporary help added to handle increased loan volumes, and occupancy and equipment expense, resulting from the expanded loan servicing operations added by the Dime and HomeSide acquisitions. Additionally, the continued development of a new loan origination platform contributed to the increase in noninterest expense.

Total assets increased by 18% from December 31, 2001. A significant portion of the increase was due to the growth in SFR loans, which resulted from new loan originations as well as the Dime and HomeSide acquisitions, and the increase in AFS securities that resulted from the change in ownership of the MSR risk management instruments.

Specialty Finance

Net income for the three and nine months ended September 30, 2002 was $110 million and $326 million, up from $84 million and $250 million for the same periods a year ago. Net interest income was $305 million and $883 million during the three and nine months ended September 30, 2002, up from

$244 million and $723 million during the same periods in 2001. The increases in net interest income predominantly reflected the lower interest expense on funding sources and an increase in interest income on nonresidential mortgage loans. Partially offsetting the decrease in funding costs was lower interest income from multi-family and other commercial real estate loans.

Noninterest income for the three and six months ended September 30, 2002 was $5 million and $48 million, compared with $16 million and $49 million for the same periods in 2001. The decrease is substantially due to a $14 million write-down in the valuation of a joint-venture agreement that occurred during the three months ended September 30, 2002. The impact on year-to-date income was offset by increases in loan related income, specifically loan prepayment fees.

Noninterest expense increased to $74 million and $225 million for the three and nine months ended September 30, 2002 from $62 million and $184 million for the same periods in 2001. These increases were primarily attributable to higher compensation and benefits expense in part due to the acquisition of Dime.

Total assets increased by 17% from December 31, 2001, primarily due to the acquisition of Dime.

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 principal sources of liquidity for our consolidated enterprise are customer deposits, wholesale borrowings, the sale and securitization of mortgage loans into secondary market channels, the maturity and repayment of portfolio loans and MBS, and agency and treasury bonds held in our available-for-sale securities portfolio. Among these sources, transaction deposits and wholesale borrowings from Federal Home Loan Bank advances and repurchase agreements continue to provide the Company with a significant source of stable funding. During the nine months ended September 30, 2002, those sources funded 70% of average total assets. Our continuing ability to retain our transaction deposit customer base and to attract new deposits is dependent on various factors, such as customer service satisfaction levels and the competitiveness of interest rates offered on our deposit products. We expect that Federal Home Loan Bank advances and repurchase agreements will continue to be our most significant sources of wholesale borrowings during 2002, and we expect to have the requisite assets available to pledge as collateral to obtain these funds.

To supplement these funding sources, our bank subsidiaries also raise funds in domestic and international capital markets. In April 2001, our two most significant bank subsidiaries, Washington Mutual Bank, FA ("WMBFA") and Washington Mutual Bank ("WMB"), established a $15 billion Global Bank Note Program (the "Program"). The Program facilitates issuance of both senior and subordinated debt in the United States and in international capital markets on both a syndicated and non-syndicated basis and in a variety of currencies and structures. Through September 30, 2002, our bank subsidiaries had issued $3.85 billion of senior notes and $1.00 billion of subordinated notes under the Program. At September 30, 2002, WMB had $4.75 billion available for issuance. WMBFA had $5.40 billion available, of which $1.40 billion was available for issuances with maturities that exceed 270 days.

Liquidity for our unconsolidated parent holding company (the "Parent Company") is generated through its ability to raise funds in various capital markets and through dividends from subsidiaries, lines of credit and commercial paper programs.

The Parent Company's funding for the nine months ended September 30, 2002 was partially received from dividends paid by our bank subsidiaries. Although we expect the Parent Company to continue to receive bank subsidiary dividends during 2002, such dividends are limited by various regulatory requirements related to capital adequacy and retained earnings. For more information on dividend restrictions applicable to our banking subsidiaries, refer to "Business – Regulation and Supervision" and

Note 17 to the Consolidated Financial Statements – "Regulatory Capital Requirements and Dividend Restrictions" in the Company's 2001 Annual Report on Form 10-K.

In November 2001, the Parent Company filed a shelf registration with the Securities and Exchange Commission that allows for the issuance of $1.5 billion of senior and subordinated debt in the United States and in international capital markets and in a variety of currencies and structures. In January 2002, $1 billion of senior debt securities were issued under this shelf registration. In April 2002, the Parent Company filed a shelf registration with the Securities and Exchange Commission that allows for the issuance of an additional $1 billion of senior and subordinated debt in the United States and in international capital markets and in a variety of currencies and structures. At September 30, 2002, $1.5 billion remained available for issuance.

On August 12, 2002, the Parent Company and Washington Mutual Finance entered into a new three-year revolving credit facility totaling $800 million. This credit facility replaces the two revolving credit facilities totaling $1.2 billion that were in effect at June 30, 2002 and will be used for the same purposes as the previous credit facilities. This facility provides back-up for the commercial paper programs of the Parent Company and Washington Mutual Finance as well as funds for general corporate purposes. The facility was arranged by J.P. Morgan Chase and includes a syndicated group of banks. At September 30, 2002, the Parent Company had no commercial paper outstanding and the amount available under this shared facility, net of the amount of commercial paper outstanding at Washington Mutual Finance, was $239 million.

Effective July 31, 2002, Washington Mutual Finance entered into an agreement with Westdeutsche Landesbank Girozentrale to participate in a $300 million asset-backed commercial paper conduit program. This commercial paper program has a 364-day term with an option to extend for up to two 364-day periods. The new revolving credit facility entered into on August 12, 2002 does not provide back-up for this commercial paper program. The conduit program provides its own back-up liquidity arrangements.

The Company maintains a noncontributory cash balance defined benefit pension plan (the "Pension Plan") for substantially all eligible employees. In measuring the variables that determine the funding status of the Pension Plan, two of the more significant assumptions that must be estimated are the expected long-term rate of return on the plan's assets, and the discount rate that is used to calculate the accumulated benefit obligation. Due to the deterioration in equity market valuations that have occurred, in particular, over the past two years, the actual performance of the Company's Pension Plan assets for 2002 will not achieve the expected long-term rate of return. Additionally, due to the extremely low interest rate environment that has existed throughout this year, the assumed discount rate for 2002 is likely to be lower than 2001, which will increase the present value of the December 31, 2002 estimated accumulated benefit obligation. The Company expects to contribute additional funding to the Pension Plan during the fourth quarter of 2002 that will be sufficient to prevent the recognition of a pension liability. The amount of this contribution is not expected to have a significant impact to the amount of liquidity resources available to the Company.

Capital Adequacy

Reflecting the effects of the Dime acquisition and strong earnings during the nine months ended September 30, 2002, the ratio of stockholders' equity to total assets increased to 7.68% at September 30, 2002 from 5.80% at December 31, 2001.

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

	September 30, 2002
	September 30, 2002						Well-Capitalized Minimum
	WMBFA		WMB		WMBfsb		Well-Capitalized Minimum
Tier 1 capital to adjusted total assets (leverage)	5.77	%	6.44	%	8.33	%	5.00%
Adjusted tier 1 capital to total risk-weighted assets	8.76		10.04		14.82		6.00
Total risk-based capital to total risk-weighted assets	10.47		11.28		16.08		10.00

Our federal savings bank subsidiaries 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 September 30, 2002.

Our broker-dealer subsidiaries are also subject to capital requirements. At September 30, 2002, both of our securities subsidiaries were in compliance with their applicable capital requirements.

During the second quarter of 2002, the Company repurchased 1.0 million shares of our common stock as part of our share repurchase program. On July 16, 2002, the Board of Directors ("Board") approved an expansion to our share repurchase program thereby authorizing the Company to repurchase 41.2 million additional shares of common stock bringing the total shares currently available to repurchase to 100.4 million. The Company repurchased 26.1 million shares during the third quarter of 2002. At September 30, 2002, our remaining purchase authority was approximately 74.3 million shares. From October 1, 2002 through October 31, 2002, the Company repurchased an additional 8.3 million shares. Management may engage in future share repurchases as liquidity conditions permit and market conditions warrant.

Market Risk Management

Certain of the statements contained within this section that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are intended to assist in the understanding of how our financial performance would be affected by the circumstances described in this section. However, such performance involves risks and uncertainties that may cause actual results to differ materially from those expressed in the forward-looking statements. See "Cautionary Statements."

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 2001 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 (formerly the Directors' Loan and Investment Committee).

Overview of Our Interest Rate Risk Profile

Increases or decreases in interest rates can cause changes in net income, fluctuations in the fair value of assets and liabilities, such as MSR, investment securities and derivatives, and changes in noninterest income and noninterest expense, particularly gain from mortgage loans, loan servicing fees and the

amortization of MSR. Our interest rate risk arises because assets and liabilities reprice, mature or prepay at different times or frequencies or in accordance with different indices as market interest rates change.

Our sensitivity to changes in interest rates is affected, in part, by the slope of the yield curve. Changes in short-term rates generally have a more immediate effect on our borrowing and deposit rates than on our asset yields. Our deposits and borrowings typically reprice faster than our mortgage loans and securities. The slower repricing of assets results mainly from the lag effect inherent in loans and MBS indexed to the 12-month average of the annual yields on actively traded U.S. Treasury securities adjusted to a constant maturity of one year and to the 11^th District FHLB monthly weighted average cost of funds index ("COFI"). For example, after short-term rates fall, the net interest margin rises and then tends to peak a few months after short-term rates stabilize and then trends downward until asset yields reprice to current market levels.

Prepayments, loan production, loan mix and gain from mortgage loans are normally all affected by changes in long-term rates and the slope of the yield curve. When long-term rates decline, prepayments tend to increase and refinancing activity also increases, leading to higher overall loan production. In a low rate environment, the percentage of new loans that are fixed-rate also increases. This in turn leads to higher gain from mortgage loans, due to our practice of selling the majority of our fixed-rate volume through secondary market channels. Although balance sheet shrinkage may occur during periods of declining or low long-term rates, net interest income may increase due to the expansion of the net interest margin.

Conversely, when long-term rates increase, prepayments slow and overall loan production is reduced. At the same time, the percentage of new loans that are adjustable-rate loans increases, and we generally retain these loans within our portfolio. Accordingly, balance sheet growth may occur in a rising long-term rate environment, although net interest income may decrease due to the contraction of the net interest margin.

Changes in long-term rates also impact the fair value and the amortization rate of MSR. The fair value of MSR decreases and the amortization rate increases in a declining long-term interest rate environment due to the higher prepayment activity, resulting in the potential for impairment and a reduction in net loan servicing income. During periods of rising long-term interest rates, the amortization rate of MSR decreases and the fair value of MSR increases, resulting in the potential recovery of the MSR valuation allowance and an increase in net loan servicing income.

Management of Interest Rate Risk

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

The interest rate contracts that are classified as asset/liability management instruments are intended to assist in the management of our net interest income. These contracts are often used to lengthen the repricing period of our interest-bearing funding sources in order to partially offset the temporary compression of the net interest margin that occurs during periods of rising short-term interest rates. The types of contracts used for this purpose consist of interest rate caps, collars, corridors, pay-fixed swaps and payor (pay-fixed) swaptions. The aggregate notional amount of these contracts totaled $44.70 billion at September 30, 2002. None of the interest rate caps had strike rates that were in effect at September 30, 2002. Some of these interest rate contracts are embedded in borrowings.

The stand alone and embedded payor swaptions are exercisable upon maturity, which ranges from February 2003 to February 2004. The embedded payor swaptions provide protection in rapidly rising interest rate environments, because these instruments offer a mechanism for fixing the rate on our interest-bearing borrowings to an interest rate that could be lower than eventual market levels.

We also held $4.32 billion of receive-fixed interest rate swaps classified as asset/liability management instruments at September 30, 2002. These instruments, which are indexed to the one- and three-month London Interbank Offering Rate ("LIBOR"), are intended to reduce the interest expense on long-term, fixed-rate borrowings during stable or falling interest rate environments. Although these borrowings provide a source for long-term funds, the interest rates on long-term borrowings may be significantly higher than the interest rate on shorter-term instruments. In addition, a portion of this long-term debt consists of subordinated debt, which generally qualifies as a component of Tier 2 risk-based capital. Therefore, we have purchased receive-fixed interest rate swaps with short-term repricing characteristics to obtain an attractive funding rate while maintaining subordinated debt as a component of risk-based capital.

We analyze the change in fair value of our MSR portfolio under a variety of parallel shifts in the yield curve. As part of our overall approach to enterprise 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. This risk management program is comprised of three elements. The first element attempts to offset the changes in fair value and higher amortization levels of MSR with changes in the fair value of risk management instruments, which include investment securities, interest rate contracts and forward purchase commitments. The goal is to offset decreases (increases) in the fair value of MSR with increases (decreases) in the fair value of the investment securities, interest rate contracts and forward contracts. The investment securities generally consist of fixed-rate debt securities, such as agency and treasury bonds and mortgage-backed securities, including principal-only strips. The interest rate contracts typically consist of interest rate floors, receive-fixed interest rate swaps and receiver (receive-fixed) swaptions. From time to time, we may choose to embed interest rate floor contracts within our borrowing instruments, such as repurchase agreements. The forward purchase commitments generally consist of agreements to purchase 15- and 30-year MBS. We classify the interest rate contracts and forward commitments used in this strategy as MSR risk management instruments. As derivatives, the receive-fixed interest rate swaps, receiver swaptions, stand alone interest rate floors and forward purchase commitments are accorded mark-to-market accounting treatment. Changes in the fair value of these instruments are recorded as components of noninterest income. For embedded floors with index rates that are below the strike rate of the contract, the resulting settlement income associated with the embedded floor is recorded as a component of the interest expense on the underlying repurchase agreement. Since embedded interest rate floor contracts are not considered to be derivatives, changes in their fair values are not marked-to-market through earnings. When embedded floors are terminated, the resulting gain or loss on the extinguishment of the repurchase agreement is recognized as a component of noninterest income.

During the third quarter, we reduced our holdings of fixed-rate bonds and receiver swaptions and liquidated our position in embedded interest rate floors. We increased our holdings of MBS and forward purchase commitments. At September 30, 2002, we held $10.36 billion of U.S. Government and agency securities and $1.33 billion of MBS that were designated as MSR risk management instruments. The current mix of MSR risk management instruments is intended to enhance the efficiency of our MSR risk management program and to deploy capital more effectively.

We adjust the mix of instruments used to manage MSR fair value changes as interest rate 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 the slope of the yield curve and other 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 execute or manage this strategy effectively.

The mix of instruments is predicated, in part, on the requirement of lower of cost or market value accounting treatment for MSR; i.e. each MSR strata is recorded at its fair market value unless the fair market 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 market value of MSR is approaching or exceeds its amortized cost.

The second element for managing changes in the fair value of MSR is the natural hedge that is inherent in our business. Generally, lower interest rates result in increased loan volume, particularly fixed-rate loan production. Since our strategy is to sell most of our fixed-rate loans, the higher volume usually results in higher gain from mortgage loans. We may adjust our holdings of MSR risk management instruments based on the expected income, and the timing of such income, from the natural business hedge. For example, in a falling interest rate environment, increases in prepayments within our loan servicing portfolio may coincide with higher refinancing activity loan volume. Accordingly, increases in amortization levels of MSR may be partially offset by increases in the gain from mortgage loans. In addition, in this environment our borrowings and deposits may also reprice faster than our assets, which would increase net interest income. Based on the anticipated increase in net interest income and gain from mortgage loans, we may adjust the amount or mix of MSR risk management instruments. Therefore, increases in income resulting from the natural business hedge can offset increased amortization and possibly a portion of the impairment.

The third and final element of this risk management program focuses on the management of the size of the MSR asset and its normal and excess servicing components. Depending on market conditions and our desire to expand customer relationships, we may periodically sell or purchase additional servicing in the future. We are also striving to reduce the excess servicing we retain on future loan sales.

We also hedge the risks associated with our mortgage pipeline. The mortgage pipeline consists of fixed-rate and, to a lesser degree, adjustable-rate SFR loans to be sold in the secondary market. The risk associated with the mortgage pipeline 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 90 days. To hedge this risk, we execute forward sales agreements and option contracts. A forward sales agreement protects us in a rising interest rate environment, since the sales price and delivery date are already established. A forward sales agreement 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. Consequently, if the loan does not fund, we may not have the necessary assets to meet the commitment; therefore, we may be required to purchase other assets, at current market prices, to satisfy the forward sales agreement. To mitigate this risk, we consider fallout factors, which represent the percentage of loans that are not expected to close, in calculating the amount of forward sales agreements to execute.

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. It is also dependent on the recognition of the estimates inherent in the projection of the natural business hedge. Our net income could be adversely affected if we are unable to effectively implement, execute or manage this strategy.

September 30, 2002 and December 31, 2001 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 also 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 non-parallel shifts in the yield curve and more extreme non-parallel rising and falling rate environments. These additional scenarios address the risk exposure over longer periods of time. They also capture the net income sensitivity due to changes in the slope of the yield curve and changes in the spread between Treasury and LIBOR rates. Typically, net income sensitivity is not as pronounced in these longer time periods as lagging assets reprice to current market levels and changes in the size of the balance sheet offset changes in the net interest margin. In addition, yields on new loan production gradually replace the comparatively lower yields of the more seasoned portion of the portfolio.

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 or falling in even quarterly increments over the twelve month period ending September 30, 2003 and

December 31, 2002. The analysis assumes increases in interest rates of 200 basis points and decreases of 100 basis points. The interest rate scenarios used below represent management's view of reasonably possible near-term interest rate movements.

		Gradual Change in Rates
		-100 basis points	+200 basis points
Net income change for the one-year period beginning:
	October 1, 2002	13.71%	2.37%
	January 1, 2002	2.19%	(2.76)%
Net interest income change for the one-year period beginning:
	October 1, 2002	(0.01)%	(1.17)%
	January 1, 2002	1.47%	(5.18)%

Net income and net interest income sensitivity changed since year-end 2001 due to the low interest rate environment, increases in the notional amount of asset/liability management instruments and the growth in deposits and pay-fixed interest rate swaps. The net income sensitivity profile is unusual due to the historically low interest rate environment, the large servicing portfolio and related risk management instruments and the composition of the balance sheet. The low interest rate environment leads to very fast projected prepayments in the -100 basis point scenario and slower projected prepayments in the +200 basis point scenario. This results in an unusual mortgage servicing profile in that increases in the fair market value of the MSR in rising interest rate scenarios exceeds the deterioration in the fair market value in comparable falling interest rate scenarios. Conversely, the fair market value of MSR risk management instruments increases more in value in falling interest rate scenarios than the fair market value decreases in comparable rising interest rate scenarios. Overall, the change in fair market value of the MSR exceeds the changes in fair market value of the MSR risk management instruments in rising interest rate scenarios and the change in fair market value of the MSR risk management instruments exceeds the change in the fair market value of the MSR in falling interest rate scenarios. The net effect is a favorable impact on net income in the -100 and +200 basis point scenarios.

This unusual profile of the MSR portfolio and related risk management instruments is unlikely to persist as the composition of the portfolio will change due to prepayments and the addition of new production. In addition, changes in interest rates could modify the profile of the MSR. In addition, the composition of the MSR risk management instruments may change over time. Management may elect to modify or adjust the MSR risk management instruments to improve the performance in non-parallel rate movements.

Net interest income was projected to decline in the +200 basis point interest environment due to decreases in the net interest margin. The decrease in the margin was somewhat offset by increased balance sheet growth. The decline in the net interest margin resulted from liability rates repricing faster than asset yields. The projected balance sheet growth resulted from a slowdown in prepayments and a shift to a higher proportion of adjustable rate loans. The reduced sensitivity of net interest income since December 31, 2001 was due to increases in fixed-rate borrowings, pay-fixed interest rate swaps and deposits. Net income was projected to increase despite the decline in net interest income mainly due to the favorable impact of the MSR and related risk management instruments as discussed above.

Net interest income was stable in the -100 basis point interest environment due to a reduction in balance sheet growth, somewhat offset by a slightly higher net interest margin. The decline in the growth of the balance sheet resulted from faster prepayments and an increase in fixed-rate saleable loan production. The projected nominal increase in the net interest margin resulted from liability rates repricing faster than asset yields. The reduced sensitivity of net interest income since December 31, 2001 was due to increases in fixed-rate borrowings, pay-fixed interest rate swaps and deposits. Net income was projected to increase despite the decline in net interest income mainly due to the favorable impact of the MSR and related risk management instruments as noted above.

The projection of the sensitivity of net income requires numerous behavioral assumptions. Prepayment, decay rate (the estimated runoff of deposit accounts that do not have a stated maturity) and new volume projections are the most significant assumptions. Prepayments affect the size of the balance sheet, which impacts net interest income, and they are also a major factor in the valuation of MSR. The decay rate assumptions also impact net interest income by altering the expected deposit mix and rates in the projected interest rate environments. The prepayment and decay rate assumptions reflect management's best estimate of future behavior. These assumptions are derived from internal and external analyses of customer behavior.

The sensitivity of new loan volume and mix to changes in market interest rate levels is also projected. Generally, we assume loan production increases in falling interest rate scenarios with an increased proportion of fixed-rate production. We generally assume a reduction in total loan production in rising interest rate scenarios with a shift towards a greater proportion of adjustable-rate production. The gain from mortgage loans as a percentage of total loan sales also varies under different interest rate scenarios. Normally, the gain from mortgage loans as a percentage of total loan sales increases in falling interest rate environments as higher consumer demand, generated primarily from high refinancing activity, allows loans to be priced more aggressively. Conversely, the gain from mortgage loans as a percentage of total loan sales tends to decline when interest rates increase as loan pricing becomes more competitive, since market participants strive to retain market share as consumer demand declines.

In addition to gain from mortgage loans, the sensitivity of noninterest income and expense are also estimated. The impairment and recovery of MSR is the most significant element of sensitivity in the projection of noninterest income. The fair value of MSR generally increases as interest rates rise and decreases as interest rates fall. The analysis assumes the change in the fair value of MSR and the related risk management instruments are recorded as components of noninterest income and assumes the composition of the MSR risk management instruments remains constant. This assumption may not be realized. The analysis also assumes that mortgage and interest rate swap spreads remain constant in all interest rate environments. Changes in these spreads could result in significant changes in the projected net income sensitivity. For example, given our current mix of MSR risk management instruments, the projected net income would increase if market rates on interest rate swaps decreased by more than the corresponding decreases in mortgage rates, while the projected net income could decline if the rates on swaps increased by more than the corresponding increases in mortgage rates. The other components of noninterest income and expense, such as deposit and loan fees and expenses, generally increase or decrease in conjunction with deposit and loan volumes, although loan servicing fees are also dependent on prepayment expectations.

Maturity and Repricing Information

We use interest rate risk management contracts as tools to manage interest rate risk. The following tables summarize the key contractual terms associated with these contracts. Interest rate risk management contracts that are embedded within certain adjustable and fixed-rate borrowings, while not accounted for as derivatives under SFAS No. 133, have been included in the tables since they also function as interest rate risk management tools. Substantially all of the interest rate contracts at September 30, 2002 are indexed to three-month LIBOR with the exception of $3.00 billion notional amount of MSR risk management floors which are indexed to the 10-year constant maturity swap ("cms").

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

					September 30, 2002
					Maturity Range
					Net Fair Value			Counter- party Credit Risk		Total Notional Amount			2002			2003			2004			2005			2006			After 2006
					(dollars in millions)
Interest Rate Risk Management Contracts:
	Asset/Liability Management
		Pay-fixed swaps:			$	(1,108	)	$	–
			Contractual maturity							$	29,363		$	413		$	8,166		$	8,834		$	3,130		$	4,709		$	4,111
			Weighted average pay rate								3.94	%		3.11	%		2.95	%		4.03	%		4.13	%		4.39	%		5.08	%
			Weighted average receive rate								1.81	%		1.84	%		1.81	%		1.80	%		1.80	%		1.84	%		1.82	%
		Receive-fixed swaps:				553			553
			Contractual maturity							$	4,322		$	100		$	600			–		$	530		$	1,000		$	2,092
			Weighted average pay rate								1.70	%		3.31	%		1.50	%		–			1.11	%		1.75	%		1.81	%
			Weighted average receive rate								6.39	%		8.25	%		5.10	%		–			5.37	%		6.81	%		6.74	%
		Interest rate caps/collars/corridors:				–			–
			Contractual maturity							$	536		$	10		$	271		$	191		$	64			–			–
			Weighted average strike rate								7.63	%		8.63	%		7.62	%		8.14	%		5.94	%		–			–
		Payor swaptions:				5			5
			Contractual maturity (option)							$	5,000			–		$	5,000			–			–			–			–
			Weighted average strike rate								6.12	%		–			6.12	%		–			–			–			–
			Contractual maturity (swap)								–			–			–			–			–		$	1,000		$	4,000
			Weighted average strike rate								–			–			–			–			–			6.05	%		6.14	%
		Embedded pay-fixed swaps:				(199	)		–
			Contractual maturity							$	2,750			–			–			–			–			–		$	2,750
			Weighted average pay rate								4.73	%		–			–			–			–			–			4.73	%
			Weighted average receive rate								1.81	%		–			–			–			–			–			1.81	%
		Embedded caps:				1			1
			Contractual maturity							$	655			–		$	155		$	500			–			–			–
			Weighted average strike rate								7.63	%		–			7.25	%		7.75	%		–			–			–
		Embedded payor swaptions⁽¹⁾:				21			21
			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 strike rate								–			–			–			–			–			5.99	%		6.34	%

				Total asset/liability management	$	(727	)	$	580	$	49,026

⁽¹⁾: Embedded interest rate swaptions are exercisable upon maturity.

(This table is continued on next page)

(Continued from previous page)

					September 30, 2002
					Maturity Range
					Net Fair Value		Counter- party Credit Risk		Total Notional Amount			2002			2003			2004			2005			2006	After 2006
					(dollars in millions)
MSR Risk Management
	Receive-fixed swaps:				$	1,665	$	1,665
		Contractual maturity							$	12,075			–			–			–			–		–	$	12,075
		Weighted average pay rate								1.84	%		–			–			–			–		–		1.84	%
		Weighted average receive rate								5.93	%		–			–			–			–		–		5.93	%
	Floors⁽²⁾:					248		248
		Contractual maturity							$	3,900			–			–			–			–		–	$	3,900
		Weighted average strike rate								6.09	%		–			–			–			–		–		6.09	%
	Receiver swaptions:					692		692
		Contractual maturity (option)							$	5,400		$	250		$	300		$	300		$	4,550		–		–
		Weighted average strike rate								6.51	%		5.69	%		5.42	%		5.99	%		6.66	%	–		–
		Contractual maturity (swap)								–			–			–			–			–		–	$	5,400
		Weighted average strike rate								–			–			–			–			–		–		6.51	%

			Total interest rate contracts			2,605		2,605	$	21,375
	FNMA 15y 5% TBA:					9		9
		Contractual maturity							$	350		$	350			–			–			–		–		–
		Weighted average price								99.01			99.01
	FNMA 30y 5.5% TBA:					30		30
		Contractual maturity							$	1,375		$	1,375			–			–			–		–		–
		Weighted average price								98.98			98.98
	FNMA 30y 6% TBA:					7		7
		Contractual maturity							$	300		$	300			–			–			–		–		–
		Weighted average price								100.44			100.44

			Total forward purchase commitments			46		46	$	2,025

			Total MSR risk management		$	2,651	$	2,651	$	23,400

				Total interest rate risk management contracts	$	1,924	$	3,231	$	72,426

⁽²⁾: At September 30, 2002, none of these floors were effective. These contracts will become effective during April and May 2003.

						December 31, 2001
						Maturity Range
						Net Fair Value			Counter- party Credit Risk		Total Notional Amount			2002			2003			2004			2005			2006			After 2006
						(dollars in millions)
Interest Rate Risk Management Contracts:
	Asset/Liability Management
		Pay-fixed swaps:				$	(9	)	$	96
			Contractual maturity								$	12,905		$	2,914		$	2,036		$	2,534		$	30		$	4,448		$	943
			Weighted average pay rate									4.82	%		6.09	%		3.78	%		4.63	%		7.15	%		4.39	%		5.58	%
			Weighted average receive rate									2.18	%		2.21	%		2.23	%		2.21	%		2.11	%		2.20	%		1.75	%
		Receive-fixed swaps:					224			230
			Contractual maturity								$	3,627		$	40		$	120			–		$	560		$	1,005		$	1,902
			Weighted average pay rate									2.05	%		2.11	%		1.95	%		–			1.89	%		2.01	%		2.13	%
			Weighted average receive rate									6.63	%		7.17	%		5.55	%		–			5.48	%		6.81	%		6.94	%
		Interest rate caps/collars/corridors:					–			–
			Contractual maturity								$	835		$	380		$	214		$	191			–		$	50			–
			Weighted average strike rate									7.59	%		7.47	%		7.86	%		8.14	%		–			5.25	%		–
		Payor swaptions:					119			119
			Contractual maturity (option)								$	5,500		$	500		$	5,000			–			–			–			–
			Weighted average strike rate									6.11	%		6.04	%		6.12	%		–			–			–			–
			Contractual maturity (swap)									–			–			–			–			–		$	1,000		$	4,500
			Weighted average strike rate									–			–			–			–			–			6.05	%		6.12	%
		Embedded caps:					2			2
			Contractual maturity								$	696			–		$	196		$	500			–			–			–
			Weighted average strike rate									7.60	%		–			7.25	%		7.75	%		–			–			–
		Embedded payor swaptions⁽¹⁾:					136			136
			Contractual maturity (option)								$	5,900			–		$	5,900			–			–			–			–
			Weighted average strike rate									6.13	%		–			6.13	%		–			–			–			–
			Contractual maturity (swap)									–			–			–			–			–		$	3,750		$	2,150
			Weighted average strike rate									–			–			–			–			–			5.99	%		6.37	%

				Total asset/liability management		$	472		$	583	$	29,463

	MSR Risk Management
		Embedded floors⁽²⁾:				$	142		$	142
			Contractual maturity								$	2,300			–			–			–		$	2,300			–			–
			Weighted average strike rate									5.12	%		–			–			–			5.12	%		–			–

				Total MSR risk management		$	142		$	142	$	2,300

					Total interest rate risk management contracts	$	614		$	725	$	31,763

⁽¹⁾: Embedded interest rate swaptions are exercisable upon maturity.
⁽²⁾: At December 31, 2001, $1.8 billion of these contracts were effective. Contractual start dates for the remaining floors began on September 15, 2002. Once effective, the floors reprice every three months.

An additional risk that arises from our interest rate risk management activities is counterparty risk. These activities generally involve an exchange of obligations with another financial institution, referred to in such transactions as a "counterparty." If a counterparty were to default, we could potentially be exposed to financial loss. In order to minimize this risk, we evaluate all counterparties for financial strength on at least an annual basis, then establish exposure limits for each counterparty. All of the counterparty credit risk is with counterparties rated A or better by Standard & Poor's at September 30, 2002, and we monitor our exposure and collateral requirements on a daily basis.

Gap Report

A conventional 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 take into consideration expected prepayment speeds and amortization of principal rather than contractual maturities. The analysis excludes reinvestment of cash. Prepayment assumptions are based on market estimates and past experience with our current loan and mortgage securities portfolio. The majority of our transaction deposits are not contractually subject to repricing. Therefore, these instruments have been allocated based on expected decay rates. Certain transaction deposits that reprice based on a market index or which typically have frequent repricing intervals were allocated based on the expected repricing period. Non-rate sensitive items such as the reserve for loan losses 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 hedged with commitments to sell loans.

The gap information is limited by the fact that it is a point-in-time analysis. The date reflects conditions and assumptions as of September 30, 2002. 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 and the allocation of instruments with optionality to a specific maturity category. Consequently, the interpretation of the gap information is subjective.

		September 30, 2002
		Projected Repricing
		0-3 months			4-12 months			1-5 years			Thereafter			Total
		(dollars in millions)
Interest-Sensitive Assets
Adjustable-rate loans⁽¹⁾		$	78,350		$	26,558		$	22,681		$	153		$	127,742
Fixed-rate loans⁽¹⁾			12,551			8,526			18,920			4,890			44,887
Adjustable-rate securities⁽¹⁾⁽²⁾			24,250			267			52			–			24,569
Fixed-rate securities⁽¹⁾			368			1,126			3,555			18,205			23,254
Cash and cash equivalents, federal funds sold and securities purchased under resale agreements			7,535			–			–			–			7,535
Derivatives matched against assets			(18,230	)		(139	)		(20	)		18,389			–

		$	104,824		$	36,338		$	45,188		$	41,637		$	227,987

Interest-Sensitive Liabilities
Noninterest-bearing checking accounts⁽³⁾		$	1,592		$	4,216		$	13,008		$	7,996		$	26,812
Interest-bearing checking accounts, savings accounts and MMDAs⁽³⁾			10,099			16,011			34,534			19,456			80,100
Time deposit accounts			8,147			14,126			10,539			872			33,684
Short-term and adjustable-rate borrowings			64,364			776			–			–			65,140
Long-term fixed-rate borrowings			5,950			8,118			9,267			4,878			28,213
Derivatives matched against liabilities			(27,086	)		(3,777	)		26,644			4,219			–

		$	63,066		$	39,470		$	93,992		$	37,421		$	233,949

Repricing gap		$	41,758		$	(3,132	)	$	(48,804	)	$	4,216		$	(5,962	)

Cumulative gap		$	41,758		$	38,626		$	(10,178	)	$	(5,962	)	$	(5,962	)

Cumulative gap as a percentage of total assets			15.90	%		14.71	%		(3.88	)%		(2.27	)%		(2.27	)%
	Total assets													$	262,605

⁽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.

PART II – OTHER INFORMATION

Item 6. Exhibits and Reports on Form 8-K

(a): Exhibits

See Index of Exhibits on page 55.

(b): Reports on Form 8-K

1. The Company filed a report on Form 8-K dated July 16, 2002. The report included under Item 7 of Form 8-K a press release announcing Washington Mutual's second quarter 2002 financial results and unaudited consolidated financial statements for the six months ended June 30, 2002.

2. The Company filed a report on Form 8-K dated August 14, 2002. The report included under Item 9 of Form 8-K written statements by Kerry K. Killinger, Chairman, President and Chief Executive Officer and William A. Longbrake, Vice Chair, Enterprise Risk Management and Chief Financial Officer of Washington Mutual, Inc., made under oath regarding facts and circumstances relating to Exchange Act filings, pursuant to Section 21 (a)(1) of the Securities Exchange Act of 1934 (SEC File No. 4-460).

3. The Company filed a report on Form 8-K dated September 10, 2002. The report included under Item 9 of Form 8-K slides that may be used by Washington Mutual, Inc. in various presentations to investors.

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 November 14, 2002.

		WASHINGTON MUTUAL, INC.
		By:		/s/ KERRY K. KILLINGER Kerry K. Killinger Chairman, President and Chief Executive Officer
		By:		/s/ ROBERT H. MILES Robert H. Miles Senior Vice President and Controller (Principal Accounting Officer)

CERTIFICATIONS

I, Kerry K. Killinger, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Washington Mutual, Inc.;

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3.

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4.

The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a): designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b): evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c): presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a): all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b): any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.: The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective action with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002

/s/ KERRY K. KILLINGER

Kerry K. Killinger
Chairman, President and Chief Executive Officer of Washington Mutual, Inc.

I, William A. Longbrake, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Washington Mutual, Inc.;

2.

3.

4.

a): designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;
b): evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c): presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

a): all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and
b): any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.: The registrant's other certifying officers and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 14, 2002

/s/ WILLIAM A. LONGBRAKE

William A. Longbrake
Vice Chair, Enterprise Risk Management and
Chief Financial Officer of Washington Mutual, Inc.

WASHINGTON MUTUAL, INC.

INDEX OF EXHIBITS

Exhibit No.
3.1		Restated Articles of Incorporation of the Company, 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		Articles of Amendment to the Amended and Restated Articles of Incorporation of Washington Mutual, Inc. creating a class of preferred stock, Series H (incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. File No. 001-14667).
3.4		Restated Bylaws of the Company, as amended (filed herewith).
4.1		Rights Agreement dated December 20, 2000 between the Company and Mellon Investor Services, L.L.C. (incorporated by reference to the Company's Current Report on Form 8-K filed January 8, 2001. File No. 0-25188).
4.2		The registrant will furnish upon request copies of all instruments defining the rights of holders of long-term debt instruments of registrant and its consolidated subsidiaries.
99(a)		Computation of Ratios of Earnings to Fixed Charges (filed herewith).
99(b)		Computation of Ratios of Earnings to Fixed Charges and Preferred Dividends (filed herewith).
99(c)		Certification of the Chief Executive Officer (filed herewith).
99(d)		Certification of the Chief Financial Officer (filed herewith).

QuickLinks

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED SEPTEMBER 30, 2002
TABLE OF CONTENTS
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Unaudited)
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY AND COMPREHENSIVE INCOME (Unaudited)
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
PART II – OTHER INFORMATION
SIGNATURES
CERTIFICATIONS
WASHINGTON MUTUAL, INC. INDEX OF EXHIBITS