WASHINGTON MUTUAL INC - 10-Q Quarterly Report

QuickLinks -- Click here to rapidly navigate through this document

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

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005

Commission File Number 1-14667

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

Washington		91-1653725
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
1201 Third Avenue, Seattle, Washington		98101
(Address of principal executive offices)		(Zip Code)

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

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

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

The number of shares outstanding of the issuer's classes of common stock as of April 29, 2005:

Common Stock – 877,243,302⁽¹⁾

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

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2005

TABLE OF CONTENTS

				*Page*
PART I – Financial Information				1
	Item 1. Financial Statements			1
		Consolidated Statements of Income – Three Months Ended March 31, 2005 and 2004		1
		Consolidated Statements of Financial Condition – March 31, 2005 and December 31, 2004		3
		Consolidated Statements of Stockholders' Equity and Comprehensive Income – Three Months Ended March 31, 2005 and 2004		4
		Consolidated Statements of Cash Flows – Three Months Ended March 31, 2005 and 2004		5
		Notes to Consolidated Financial Statements		7
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			17
			Cautionary Statements	17
			Overview	18
			Controls and Procedures	19
			Critical Accounting Policies	20
			Recently Issued Accounting Standards	20
			Summary Financial Data	22
			Earnings Performance from Continuing Operations	23
			Review of Financial Condition	31
			Operating Segments	34
			Risk Management	38
			Credit Risk Management	39
			Liquidity Risk Management	41
			Off-Balance Sheet Activities	43
			Capital Adequacy	43
			Market Risk Management	44
			Maturity and Repricing Information	48
			Operational Risk Management	54
	Item 3. Quantitative and Qualitative Disclosures About Market Risk			44
	Item 4. Controls and Procedures			19
PART II – Other Information				55
	Item 1. Legal Proceedings			55
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			55
	Item 4. Submission of Matters to a Vote of Security Holders			56
	Item 6. Exhibits			56

PART I – FINANCIAL INFORMATION

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

					Three Months Ended March 31,
					2005			2004
					(in millions, except per share amounts)
Interest Income
	Loans held for sale				$	470		$	332
	Loans held in portfolio					2,544			2,067
	Available-for-sale securities					224			265
	Trading securities					79			24
	Other interest and dividend income					43			33

		Total interest income				3,360			2,721
Interest Expense
	Deposits					696			443
	Borrowings					774			546

		Total interest expense				1,470			989

			Net interest income			1,890			1,732
	Provision for loan and lease losses					16			56

		Net interest income after provision for loan and lease losses				1,874			1,676
Noninterest Income
	Home loan mortgage banking income (expense):
		Loan servicing fees				489			502
		Amortization of mortgage servicing rights				(570	)		(750	)
		Net mortgage servicing rights valuation adjustments				539			(606	)
		Revaluation gain from derivatives				63			1,042
		Net settlement income from certain interest-rate swaps				51			167
		Gain from mortgage loans				178			171
		Other home loan mortgage banking income, net				26			5

			Total home loan mortgage banking income			776			531
	Depositor and other retail banking fees					490			463
	Securities fees and commissions					110			107
	Insurance income					46			61
	Portfolio loan related income					85			87
	Trading securities income (loss)					(89	)		8
	Gain (loss) from other available-for-sale securities					(122	)		21
	Loss on extinguishment of borrowings					–			(89	)
	Other income					112			48

		Total noninterest income				1,408			1,237
Noninterest Expense
	Compensation and benefits					876			899
	Occupancy and equipment					402			400
	Telecommunications and outsourced information services					104			123
	Depositor and other retail banking losses					55			40
	Advertising and promotion					55			58
	Professional fees					34			39
	Other expense					313			321

		Total noninterest expense				1,839			1,880

			Income from continuing operations before income taxes			1,443			1,033
			Income taxes			541			385

				Income from continuing operations, net of taxes		902			648

(This table is continued on the next page.)

See Notes to Consolidated Financial Statements.

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

(This table is continued from the previous page.)

			Three Months Ended March 31,
			2005		2004
			(in millions, except per share amounts)
Discontinued Operations
	Loss from discontinued operations before income taxes			–	$	(32	)
	Gain on disposition of discontinued operations			–		676
	Income taxes			–		245

		Income from discontinued operations, net of taxes		–		399

Net Income			$	902	$	1,047

Basic earnings per common share:
	Income from continuing operations		$	1.04	$	0.75
	Income from discontinued operations, net			–		0.46

		Net Income		1.04		1.21
Diluted earnings per common share:
	Income from continuing operations		$	1.01	$	0.73
	Income from discontinued operations, net			–		0.45

		Net Income		1.01		1.18
Dividends declared per common share				0.46		0.42
Basic weighted average number of common shares outstanding (in thousands)				864,933		863,299
Diluted weighted average number of common shares outstanding (in thousands)				888,789		886,467

See Notes to Consolidated Financial Statements.

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

				March 31, 2005			December 31, 2004
				(dollars in millions)
Assets
	Cash and cash equivalents			$	4,811		$	4,455
	Federal funds sold and securities purchased under agreements to resell				1,152			82
	Trading securities				6,066			5,588
	Available-for-sale securities, total amortized cost of $20,569 and $19,047:
		Mortgage-backed securities (including assets pledged of $6,664 and $5,716)			15,947			14,923
		Investment securities (including assets pledged of $2,480 and $3,344)			4,756			4,296

			Total available-for-sale securities		20,703			19,219
	Loans held for sale				41,197			42,743
	Loans held in portfolio				214,114			207,071
	Allowance for loan and lease losses				(1,280	)		(1,301	)

			Total loans held in portfolio, net of allowance for loan and lease losses		212,834			205,770
	Investment in Federal Home Loan Banks				3,973			4,059
	Mortgage servicing rights				6,802			5,906
	Goodwill				6,196			6,196
	Other assets				15,962			13,900

			Total assets	$	319,696		$	307,918

Liabilities
	Deposits:
		Noninterest-bearing deposits		$	34,941		$	32,780
		Interest-bearing deposits			148,690			140,878

			Total deposits		183,631			173,658
	Federal funds purchased and commercial paper				2,053			4,045
	Securities sold under agreements to repurchase				16,716			15,944
	Advances from Federal Home Loan Banks				66,730			70,074
	Other borrowings				21,938			18,498
	Other liabilities				6,861			4,473

			Total liabilities		297,929			286,692
Stockholders' Equity
	Common stock, no par value: 1,600,000,000 shares authorized, 877,286,984 and 874,261,898 shares issued and outstanding				–			–
	Capital surplus – common stock				3,399			3,350
	Accumulated other comprehensive loss				(84	)		(76	)
	Retained earnings				18,452			17,952

			Total stockholders' equity		21,767			21,226

			Total liabilities and stockholders' equity	$	319,696		$	307,918

See Notes to Consolidated Financial Statements.

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AND COMPREHENSIVE INCOME
(UNAUDITED)

			Number of Shares		Capital Surplus- Common Stock			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total
			(in millions)
BALANCE, December 31, 2003			881.0		$	3,682		$	(524	)	$	16,584		$	19,742
Comprehensive income:
	Net income		–			–			–			1,047			1,047
	Other comprehensive income (loss), net of tax:
		Net unrealized gain from securities arising during the period, net of reclassification adjustments	–			–			388			–			388
		Net unrealized gain from cash flow hedging instruments	–			–			130			–			130
		Minimum pension liability adjustment	–			–			(6	)		–			(6	)

Total comprehensive income															1,559
Cash dividends declared on common stock			–			–			–			(367	)		(367	)
Common stock repurchased and retired			(16.1	)		(712	)		–			–			(712	)
Common stock issued			4.1			161			–			–			161

BALANCE, March 31, 2004			869.0		$	3,131		$	(12	)	$	17,264		$	20,383

BALANCE, December 31, 2004			874.3		$	3,350		$	(76	)	$	17,952		$	21,226
Comprehensive income:
	Net income		–			–			–			902			902
	Other comprehensive income (loss), net of tax:
		Net unrealized loss from securities arising during the period, net of reclassification adjustments	–			–			(25	)		–			(25	)
		Net unrealized gain from cash flow hedging instruments	–			–			17			–			17

Total comprehensive income															894
Cash dividends declared on common stock			–			–			–			(402	)		(402	)
Common stock repurchased and retired			(2.6	)		(100	)		–			–			(100	)
Common stock issued			5.6			149			–			–			149

BALANCE, March 31, 2005			877.3		$	3,399		$	(84	)	$	18,452		$	21,767

See Notes to Consolidated Financial Statements.

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

				Three Months Ended March 31,
				2005			2004
				(in millions)
Cash Flows from Operating Activities
	Net income			$	902		$	1,047
	Income from discontinued operations, net of taxes				–			(399	)

		Income from continuing operations			902			648
	Adjustments to reconcile income from continuing operations to net cash used by operating activities:
		Provision for loan and lease losses			16			56
		Gain from mortgage loans			(178	)		(171	)
		Loss (gain) from available-for-sale securities			119			(21	)
		Revaluation gain from derivatives			(63	)		(1,042	)
		Loss on extinguishment of borrowings			–			89
		Depreciation and amortization			688			916
		Provision for mortgage servicing rights (reversal) impairment			(427	)		606
		Stock dividends from Federal Home Loan Banks			(5	)		(27	)
		Origination and purchases of loans held for sale, net of principal payments			(39,278	)		(32,813	)
		Proceeds from sales of loans held for sale			35,033			18,962
		Net (increase) decrease in trading securities			(344	)		413
		(Increase) decrease in other assets			(474	)		2,562
		Increase (decrease) in other liabilities			1,001			(603	)

			Net cash used by operating activities		(3,010	)		(10,425	)
Cash Flows from Investing Activities
	Purchases of securities				(5,964	)		(11	)
	Proceeds from sales and maturities of mortgage-backed securities				2,447			255
	Proceeds from sales and maturities of other available-for-sale securities				874			14,027
	Principal payments on securities				749			860
	Purchases of Federal Home Loan Bank stock				–			(441	)
	Redemption of Federal Home Loan Bank stock				91			14
	Origination and purchases of loans held in portfolio				(21,653	)		(28,847	)
	Principal payments on loans held in portfolio				18,988			16,624
	Proceeds from sales of loans held in portfolio				138			197
	Proceeds from sales of foreclosed assets				102			123
	Net increase in federal funds sold and securities purchased under agreements to resell				(1,070	)		(1,764	)
	Purchases of premises and equipment, net				(59	)		(214	)
	Proceeds from sale of discontinued operations, net of cash sold				–			1,223

		Net cash (used) provided by investing activities			(5,357	)		2,046

(The Consolidated Statements of Cash Flows are continued on the next page.)

See Notes to Consolidated Financial Statements.

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

(Continued from the previous page.)

			Three Months Ended March 31,
			2005			2004
			(in millions)
Cash Flows from Financing Activities
	Increase in deposits		$	9,973		$	7,800
	Increase (decrease) in short-term borrowings			1,386			(10,910	)
	Proceeds from long-term borrowings			1,294			1,475
	Repayments of long-term borrowings			(216	)		(100	)
	Proceeds from advances from Federal Home Loan Banks			23,404			26,605
	Repayments of advances from Federal Home Loan Banks			(26,745	)		(16,521	)
	Cash dividends paid on common stock			(402	)		(367	)
	Repurchase of common stock			(100	)		(712	)
	Other			129			136

		Net cash provided by financing activities		8,723			7,406

		Increase (decrease) in cash and cash equivalents		356			(973	)
		Cash and cash equivalents, beginning of period		4,455			7,018

		Cash and cash equivalents, end of period	$	4,811		$	6,045

Noncash Activities
	Loans exchanged for mortgage-backed securities		$	668		$	1,067
	Real estate acquired through foreclosure			106			121
Cash Paid During the Year For
	Interest on deposits		$	616		$	394
	Interest on borrowings			731			566
	Income taxes			244			33

See Notes to Consolidated Financial Statements.

WASHINGTON MUTUAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Accounting Policies

Basis of Presentation

The accompanying Consolidated Financial Statements are unaudited and include the accounts of Washington Mutual, Inc. and its subsidiaries ("Washington Mutual" or the "Company"). Washington Mutual's accounting and financial reporting policies are in accordance with accounting principles generally accepted in the United States of America. The information furnished in these interim statements reflects all adjustments that are, in the opinion of management, necessary for a fair statement of the results for such periods. Such adjustments are of a normal recurring nature unless otherwise disclosed in this Form 10-Q. The results of operations in the interim statements are not necessarily indicative of the results that may be expected for the full year. The interim financial information should be read in conjunction with Washington Mutual, Inc.'s 2004 Annual Report on Form 10-K. Certain prior period amounts have been reclassified to conform to current period classifications.

Recently Adopted Accounting Standards

In December 2003, the Accounting Standards Executive Committee of the AICPA issued Statement of Position No. 03-3 ("SOP 03-3"), Accounting for Certain Loans or Debt Securities Acquired in a Transfer. SOP 03-3 addresses the accounting for differences between the contractual cash flows and the cash flows expected to be collected from purchased loans or debt securities if those differences are attributable, in part, to credit quality. SOP 03-3 does not permit the carryover of any valuation allowance previously recognized by the seller. Interest income should be recognized based on the effective yield from the cash flows expected to be collected. To the extent that the purchased loans experience subsequent deterioration in credit quality, a valuation allowance would be established for any additional cash flows that are not expected to be received. However, if more cash flows subsequently are expected to be received than originally estimated, the effective yield would be adjusted on a prospective basis. SOP 03-3 is effective for loans and debt securities acquired after December 31, 2004. The adoption of SOP 03-3 did not have a material effect on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition.

Stock-Based Compensation

In accordance with the transitional guidance of Statement No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123, the Company elected to prospectively apply the fair value method of accounting for stock-based awards granted subsequent to December 31, 2002. For such awards, fair value is estimated using a modified Black-Scholes model, with compensation expense recognized in earnings over the required service period. Stock-based awards granted prior to January 1, 2003, and not modified after December 31, 2002, will continue to be accounted for under Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees. The pro forma presentation of the impact these awards would have on the consolidated financial statements, if they were accounted for on the fair value basis, will continue to be disclosed in the Notes to Consolidated Financial Statements until the last of those awards vest in December 2005.

Had compensation cost for the Company's stock-based compensation plans been determined using the fair value method consistent with Statement No. 123 for all periods presented, the Company's net

income attributable to common stock and net income per common share would have been reduced to the pro forma amounts indicated below:

		Three Months Ended March 31,
		2005			2004
		(dollars in millions, except per share amounts)
Net income attributable to common stock		$	902		$	1,047
Add back: Stock-based employee compensation expense included in reported net income, net of related tax effects			22			21
Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, net of related tax effects			(28	)		(31	)

Pro forma net income attributable to common stock		$	896		$	1,037

Net income per common share:
Basic:
	As reported	$	1.04		$	1.21
	Pro forma		1.04			1.20
Diluted:
	As reported		1.01			1.18
	Pro forma		1.01			1.17

Recently Issued Accounting Standards

In March 2005, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 47 ("FIN 47"), Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement of Financial Accounting Standards ("Statement") No. 143, Accounting for Asset Retirement Obligations. FIN 47 generally applies to long-lived assets and requires a liability to be recognized for a conditional asset retirement obligation if the fair value of that liability can be reasonably estimated. A conditional asset retirement obligation is defined as a legal obligation to perform an activity associated with an asset retirement in which the timing and/or method of settlement are conditional on a future event that may or may not occur or be within the control of the company. A liability should be recognized when incurred (based on its fair value at that date), which generally would be upon acquisition or construction of the related asset. Upon recognition, the offset to the liability would be capitalized as part of the cost of the asset and depreciated over the estimated useful life of that asset. The Interpretation is effective no later than December 31, 2005, with early application encouraged. The Company is still in the process of evaluating the impact of FIN 47; however, at this time the Company does not expect the impact to have a significant effect on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition.

In March 2005, the FASB issued FASB Staff Position EITF 85-24-1 ("FSP EITF 85-24-1"), Distribution Fees by Distributors of Mutual Funds That Do Not Have a Front-End Sales Charge. FSP EITF 85-24-1 considers the appropriate accounting for cash received from a third party for a distributor's right to future cash flows relating to distribution fees for shares previously sold. The FASB staff concluded that revenue recognition is appropriate when cash is received from a third party if the distributor no longer has any continuing involvement or recourse associated with the rights. FSP EITF 85-24-1 must be applied for the quarter ended June 30, 2005. The Company is still in the process of evaluating the impact of the FSP; however, at this time the Company does not expect the impact to have a significant effect on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition.

In December 2004, the FASB issued a revised version of the original Statement No. 123, Accounting for Stock-Based Compensation. Statement No. 123R, Share-Based Payment, supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. This Statement requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. This Statement establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair value-based measurement method in accounting for share-based payment transactions with employees, except for equity instruments held by employee stock ownership plans. Effective January 1, 2003 and in accordance with the transitional guidance of Statement No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, the Company elected to prospectively apply the fair value method of accounting for stock-based awards granted subsequent to December 31, 2002. The Company will prospectively apply Statement No. 123R to its financial statements as of January 1, 2006. However, as the Company has already adopted Statement No. 148 and substantially all stock-based awards granted prior to its adoption will be fully vested by the end of this year, Statement No. 123R will not have a significant effect on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition.

In March 2005, Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 107 ("SAB 107") was issued, which expresses views of the staff regarding the interaction between Statement No. 123R, Share Based Payment, and certain SEC rules and regulations and provides the staff's views regarding the valuation of share-based payment arrangements for public companies. The Company will review the guidance provided by SAB 107 as part of its adoption of Statement No. 123R.

Note 2: Discontinued Operations

During the first quarter of 2004 the Company sold its consumer finance subsidiary, Washington Mutual Finance Corporation. Accordingly, this former subsidiary has been accounted for as a discontinued operation and the results of operations and cash flows have been removed from the Company's results of continuing operations for all periods presented on the Consolidated Statements of Income, Cash Flows and Notes to the Consolidated Financial Statements, unless otherwise noted. The results from discontinued operations in 2004 amounted to $399 million net of tax, which includes a pretax gain of $676 million ($420 million, net of tax) that was recorded upon the sale of Washington Mutual Finance Corporation.

Note 3: Earnings Per Share

Information used to calculate earnings per share was as follows:

			Three Months Ended March 31,
			2005	2004
			(in thousands)
Weighted average shares
	Basic weighted average number of common shares outstanding		864,933	863,299
	Dilutive effect of potential common shares from:
		Awards granted under equity incentive programs	14,270	12,607
		Trust Preferred Income Equity Redeemable Securities^SM	9,586	10,561

	Diluted weighted average number of common shares outstanding		888,789	886,467

For the three months ended March 31, 2005 and 2004, options to purchase an additional 8,956,920 and 56,254 shares of common stock were outstanding, but were not included in the computation of diluted earnings per share because their inclusion would have had an antidilutive effect.

Additionally, as part of the 1996 business combination with Keystone Holdings, Inc. (the parent of American Savings Bank, F.A.), 6 million shares of common stock, with an assigned value of $18.4944 per share, are being held in escrow for the benefit of certain of the former investors in Keystone Holdings and their transferees. During 2003, the number of escrow shares was reduced from 18 million to 6 million as a result of the return and cancellation of 12 million shares to the Company. The escrow will expire on December 20, 2008, subject to certain limited extensions. 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 March 31, 2005, the conditions for releasing the shares from escrow had not occurred, and therefore, none of the shares in the escrow were included in the above computations.

Note 4: Mortgage Banking Activities

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

			Three Months Ended March 31,
			2005			2004
			(in millions)
Balance, beginning of period			$	540,392		$	582,669
	Home loans:
		Additions		34,533			22,009
		Loan payments and other		(32,861	)		(46,058	)
	Net change in commercial real estate loans serviced for others			733			1,187

Balance, end of period			$	542,797		$	559,807

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

			Three Months Ended March 31,
			2005			2004
			(in millions)
Balance, beginning of period			$	5,906		$	6,354
	Home loans:
		Additions		490			241
		Amortization		(570	)		(750	)
		(Impairment) reversal		427			(606	)
		Statement No. 133 MSR accounting valuation adjustments		545			–
	Net change in commercial real estate MSR			4			–

Balance, end of period⁽¹⁾			$	6,802		$	5,239

⁽¹⁾: At March 31, 2005 and 2004, aggregate MSR fair value was $6.81 billion and $5.25 billion.

Changes in the valuation allowance for MSR were as follows:

		Three Months Ended March 31,
		2005			2004
		(in millions)
Balance, beginning of period		$	1,981		$	2,435
	Impairment (reversal)		(427	)		606
	Other-than-temporary impairment		(34	)		–
	Other		(7	)		(6	)

Balance, end of period		$	1,513		$	3,035

At March 31, 2005, the expected weighted average life of the Company's MSR was 3.8 years. Projected amortization expense for the gross carrying value of MSR at March 31, 2005 is estimated to be as follows (in millions):

Remainder of 2005		$	1,420
2006			1,459
2007			1,079
2008			830
2009			652
After 2009			2,875

Gross carrying value of MSR			8,315
Less: valuation allowance			(1,513	)

	Net carrying value of MSR	$	6,802

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 projected MSR prepayment estimates and discount rates, as were used to determine amortization expense at the end of the first quarter of 2005. 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 5: Guarantees

The Company sells loans without recourse that may have to be subsequently repurchased if a defect that occurred during the loan's origination process results in a violation of a representation or warranty made in connection with the sale of the loan. When a loan sold to an investor without recourse fails to perform according to its contractual terms, the investor will typically review the loan file to determine whether defects in the origination process occurred and if such defects constitute a violation of a representation or warranty made to the investor in connection with the sale. If such a defect is identified, the Company may be required to either repurchase the loan or indemnify the investor for losses sustained. If there are no such defects, the Company has no commitment to repurchase the loan. As of March 31, 2005 and December 31, 2004, the amount of loans sold without recourse totaled $535.98 billion and $533.51 billion, which substantially represents the unpaid principal balance of the Company's loans serviced for others portfolio. The Company has accrued $190 million as of March 31, 2005 and $148 million as of December 31, 2004 to cover the estimated loss exposure related to the loan origination process defects that are inherent within this portfolio.

At March 31, 2005, the Company was the guarantor of five separate issues of trust preferred securities. The Company has issued subordinated debentures to wholly-owned special purpose trusts. Each trust has issued preferred securities. The sole assets of each trust are the subordinated debentures issued by the Company. The Company guarantees the accumulated and unpaid distributions of each trust, to the extent the Company provided funding to the trust per the Company's obligations under subordinated debentures, but the trust fails to fulfill its distribution requirements to the security holders. The maximum potential amount of future payments the Company could be required to make under this guarantee is the expected principal and interest each trust is obligated to remit under the issuance of trust preferred securities, which totaled $2.24 billion as of March 31, 2005. No liability has been recorded as the Company does not expect it will be required to perform under this guarantee.

Note 6: Employee Benefits Programs

Pension Plan

Washington Mutual maintains a noncontributory cash balance defined benefit pension plan (the "Pension Plan") for eligible employees. Benefits earned for each year of service are based primarily on the level of compensation in that year plus a stipulated rate of return on the benefit balance. It is the Company's policy to contribute funds to the Pension Plan on a current basis to the extent the amounts are sufficient to meet minimum funding requirements as set forth in employee benefit and tax laws plus such additional amounts the Company determines to be appropriate.

Nonqualified Defined Benefit Plans and Other Postretirement Benefit Plans

The Company, as successor to previously acquired companies, has assumed responsibility for a number of nonqualified, noncontributory, unfunded postretirement benefit plans, including retirement restoration plans for certain employees, supplemental retirement plans for certain officers and multiple outside directors' retirement plans. Benefits under the retirement restoration plans are generally determined by the Company. Benefits under the supplemental retirement plans and outside directors' retirement plans are generally based on years of service.

The Company, as successor to previously acquired companies, maintains unfunded defined benefit postretirement plans that make medical and life insurance coverage available to eligible retired employees and their beneficiaries and covered dependents. The expected cost of providing these benefits to retirees, their beneficiaries and covered dependents was accrued during the years each employee provided services.

Components of net periodic benefit cost for the Pension Plan, Nonqualified Defined Benefit Plans and Other Postretirement Benefit Plans were as follows:

		Three Months Ended March 31,
		2005							2004
		Pension Plan			Nonqualified Defined Benefit Plans		Other Postretirement Benefit Plans		Pension Plan			Nonqualified Defined Benefit Plans		Other Postretirement Benefit Plans
		(in millions)
Interest cost		$	22		$	2	$	1	$	21		$	2	$	1
Service cost			21			–		–		22			–		–
Expected return on plan assets			(26	)		–		–		(27	)		–		–
Amortization of prior service cost			2			–		–		1			–		–
Amortization of net loss			7			1		–		9			–		–

	Net periodic benefit cost	$	26		$	3	$	1	$	26		$	2	$	1

Note 7: Operating Segments

The Company has three operating segments for the purpose of management reporting: the Retail Banking and Financial Services Group, the Mortgage Banking Group and the Commercial Group. Unlike financial accounting, there is no comprehensive, authoritative guidance for management reporting. The management reporting process measures the performance of the operating segments based on the management structure of the Company and is not necessarily comparable with similar information for any other financial institution. The Company's operating segments are defined by the products and services they offer.

The Retail Banking and Financial Services Group's principal activities include: (1) offering a comprehensive line of deposit and other retail banking products and services to consumers and small businesses; (2) originating, managing and servicing home equity loans and lines of credit; (3) providing investment advisory and brokerage services, sales of annuities, mutual fund management and other financial services; and (4) holding the Company's portfolio of home loans held for investment. This segment's home loan portfolio consists of home loans purchased from both the Mortgage Banking segment and secondary market participants as well as purchased home loans made to subprime borrowers.

The Mortgage Banking Group's principal activities include: (1) originating and servicing home loans; (2) buying and selling home loans in the secondary market; and (3) selling insurance-related products and participating in reinsurance activities with other insurance companies. For management reporting purposes, home loans originated by this segment are either sold to the Retail Banking and Financial Services Group or are sold to secondary market participants. The segment typically retains the rights to service these loans and receives fees and other forms of remuneration for providing this service. The Mortgage Banking Group performs home loan servicing activities for substantially all of the Company's managed portfolio – whether the home loans are held in portfolio or have been sold to secondary market participants. Insurance products that complement the mortgage lending process, such as private mortgage insurance and property and casualty insurance, are also made available. This segment also manages the Company's captive reinsurance activities.

The Commercial Group's principal activities include: (1) providing financing to developers and investors for the acquisition or construction of multi-family dwellings and, to a lesser extent, other commercial properties; (2) originating and servicing multi-family and other commercial real estate loans and either holding such loans in portfolio as part of its commercial asset management business or selling them in the secondary market; (3) providing financing to mortgage bankers for the origination of residential loan products; and (4) originating and servicing home loans made to subprime borrowers through the Company's subsidiary, Long Beach Mortgage Company.

The Corporate Support/Treasury and Other category includes enterprise-wide management of the Company's interest rate risk, liquidity, capital, borrowings, and a majority of the Company's investment securities. As part of the Company's asset and liability management process, the Treasury function provides oversight and direction across the enterprise over matters that impact the profile of the Company's balance sheet, such as product composition of loans that the Company holds in the portfolio, the appropriate mix of wholesale and capital markets borrowings at any given point in time, and the allocation of capital resources to the business segments. This category also includes the costs of the Company's technology services, facilities, legal, human resources and accounting and finance functions to the extent not allocated to the business segments. Also reported in this category is the net impact of funds transfer pricing for loan and deposit balances and all charges incurred from the Company's cost containment initiative.

The Company uses various management accounting methodologies, which are enhanced from time to time, to assign certain balance sheet and income statement items to the responsible operating segment.

Methodologies that are applied to the measurement of segment profitability include: (1) a funds transfer pricing system, which allocates interest income funding credits and funding charges between the operating segments and the Treasury Division. A segment will receive a funding credit from the Treasury Division for its liabilities and its share of risk-adjusted economic capital. Conversely, a segment is assigned a charge by the Treasury Division to fund its assets. The system is based on the interest rate sensitivities of assets and liabilities and is designed to extract net interest income volatility from the business units and concentrate it in the Treasury Division, where it is managed. Certain basis and other residual risk remains in the operating segments; (2) a calculation of the provision for loan and lease losses based on management's current assessment of the long-term, normalized net charge-off ratio for loan products within each segment, which is recalibrated periodically to the latest available loan loss experience data. This process differs from the "losses inherent in the loan portfolio" methodology that is used to measure the allowance for loan and lease losses for consolidated reporting purposes. This methodology is used to provide segment management with provision information for strategic decision making; (3) the utilization of an activity-based costing approach to measure allocations of certain operating expenses that were not directly charged to the segments; (4) the allocation of goodwill and other intangible assets to the operating segments based on benefits received from each acquisition; (5) capital charges for goodwill as a component of an internal measurement of return on the goodwill allocated to the operating segment; and (6) inter-segment activities which include the transfer of originated mortgage loans that are to be held in portfolio from the Mortgage Banking Group to the Retail Banking and Financial Services Group and a broker fee arrangement between Mortgage Banking and Retail Banking and Financial Services. When originated mortgage loans are transferred, the Mortgage Banking Group records a gain on the sale of the loans based on an assumed profit factor. This profit factor is included in the value of the transferred loans and is amortized as an adjustment to the net interest income recorded by the Retail Banking and Financial Services Group. Inter-segment broker fees are recorded by the Retail Banking and Financial Services Group when home loans are initiated through retail banking stores, while the Mortgage Banking Group records a broker fee when the origination of home equity loans and lines of credit are initiated through home loan stores. The results of all inter-segment activities are eliminated as reconciling adjustments that are necessary to conform the presentation of management accounting policies to the accounting principles used in the Company's consolidated financial statements.

Financial highlights by operating segment were as follows:

		Three Months Ended March 31, 2005
		Retail Banking and Financial Services Group			Mortgage Banking Group			Commercial Group			Corporate Support/ Treasury and Other			Reconciling Adjustments			Total
		(dollars in millions)
Condensed income statement:
	Net interest income (expense)	$	1,343		$	286		$	323		$	(175	)	$	113	⁽¹⁾	$	1,890
	Provision for loan and lease losses		37			–			2			–			(23	)⁽²⁾		16
	Noninterest income (expense)		695			682			158			(65	)		(62	)⁽³⁾		1,408
	Inter-segment revenue (expense)		12			(12	)		–			–			–			–
	Noninterest expense		1,148			566			175			158			(208	)⁽⁴⁾		1,839

	Income (loss) before income taxes		865			390			304			(398	)		282			1,443
	Income taxes (benefit)		327			147			104			(149	)		112	⁽⁵⁾		541

	Net income (loss)	$	538		$	243		$	200		$	(249	)	$	170		$	902

Performance and other data:
	Efficiency ratio		49.78	%⁽⁶⁾		53.83	%⁽⁶⁾		30.36	%⁽⁶⁾		n/a			n/a			55.77	%⁽⁷⁾
	Average loans	$	177,635		$	27,765		$	41,783			n/a		$	(1,556	)⁽⁸⁾	$	245,627
	Average assets		190,479			49,019			46,647		$	23,809			(1,782	)⁽⁸⁾⁽⁹⁾		308,172
	Average deposits		132,982			13,107			7,308			21,788			n/a			175,185
	Loan volume		12,493			38,498			8,524			n/a			n/a			59,515
	Employees at end of period		31,152			12,626			3,530			5,180			n/a			52,488

⁽¹⁾: Represents the difference between home loan premium amortization recorded by the Retail Banking and Financial Services Group and the amount recognized in the Company's Consolidated Statements of Income. For management reporting purposes, loans that are held in portfolio by the Retail Banking and Financial Services Group are treated as if they are purchased from the Mortgage Banking Group. Since the cost basis of these loans includes an assumed profit factor paid to the Mortgage Banking Group, the amortization of loan premiums recorded by the Retail Banking and Financial Services Group includes this assumed profit factor and must therefore be eliminated as a reconciling adjustment.
⁽²⁾: Represents the difference between the long-term, normalized net charge-off ratio used to assess expected loan and lease losses for the operating segments and the "losses inherent in the loan portfolio" methodology used by the Company.
⁽³⁾: Represents the difference between gain from mortgage loans recorded by the Mortgage Banking Group and the gain from mortgage loans recognized in the Company's Consolidated Statements of Income. As the Mortgage Banking Group holds no loans in portfolio, all loans originated or purchased by this segment are considered to be salable for management reporting purposes.
⁽⁴⁾: Represents the corporate offset for cost of capital related to goodwill that has been allocated to the segments.
⁽⁵⁾: Represents the tax effect of reconciling adjustments.
⁽⁶⁾: The efficiency ratio is defined as noninterest expense, excluding a cost of capital charge on goodwill, divided by total revenue (net interest income and noninterest income).
⁽⁷⁾: The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income).
⁽⁸⁾: Includes the inter-segment offset for inter-segment loan premiums that the Retail Banking and Financial Services Group recognized from the transfer of portfolio loans from the Mortgage Banking Group.
⁽⁹⁾: Includes the impact to the allowance for loan and lease losses of $226 million that results from the difference between the long-term, normalized net charge-off ratio used to assess expected loan and lease losses for the operating segments and the "losses inherent in the loan portfolio" methodology used by the Company.

		Three Months Ended March 31, 2004
		Retail Banking and Financial Services Group			Mortgage Banking Group			Commercial Group			Corporate Support/ Treasury and Other			Reconciling Adjustments			Total
		(dollars in millions)
Condensed income statement:
	Net interest income (expense)	$	1,187		$	288		$	343		$	(189	)	$	103	⁽¹⁾	$	1,732
	Provision for loan and lease losses		58			–			16			–			(18	)⁽²⁾		56
	Noninterest income (expense)		623			761			86			(69	)		(164	)⁽³⁾		1,237
	Inter-segment revenue (expense)		6			(6	)		–			–			–			–
	Noninterest expense		1,071			677			156			186			(210	)⁽⁴⁾		1,880

	Income (loss) from continuing operations before income taxes		687			366			257			(444	)		167			1,033
	Income taxes (benefit)		260			138			90			(165	)		62	⁽⁵⁾		385

	Income (loss) from continuing operations		427			228			167			(279	)		105			648
	Income from discontinued operations, net of taxes		–			–			–			399			–			399

	Net income	$	427		$	228		$	167		$	120		$	105		$	1,047

Performance and other data:
	Efficiency ratio		51.86	%⁽⁶⁾		59.98	%⁽⁶⁾		29.57	%⁽⁶⁾		n/a			n/a			63.34	%⁽⁷⁾
	Average loans	$	149,377		$	19,871		$	36,984			n/a		$	(1,505	)⁽⁸⁾	$	204,727
	Average assets		161,359			38,914			42,805		$	29,996			(1,668	)⁽⁸⁾⁽⁹⁾		271,406
	Average deposits		128,000			14,877			6,049			5,028			n/a			153,954
	Loan volume		12,778			43,720			5,667			n/a			n/a			62,165
	Employees at end of period		29,077			21,203			3,130			5,763			n/a			59,173

⁽¹⁾: Represents the difference between home loan premium amortization recorded by the Retail Banking and Financial Services Group and the amount recognized in the Company's Consolidated Statements of Income. For management reporting purposes, loans that are held in portfolio by the Retail Banking and Financial Services Group are treated as if they are purchased from the Mortgage Banking Group. Since the cost basis of these loans includes an assumed profit factor paid to the Mortgage Banking Group, the amortization of loan premiums recorded by the Retail Banking and Financial Services Group includes this assumed profit factor and must therefore be eliminated as a reconciling adjustment.
⁽²⁾: Represents the difference between the long-term, normalized net charge-off ratio used to assess expected loan and lease losses for the operating segments and the "losses inherent in the loan portfolio" methodology used by the Company.
⁽³⁾: Represents the difference between gain from mortgage loans recorded by the Mortgage Banking Group and the gain from mortgage loans recognized in the Company's Consolidated Statements of Income. As the Mortgage Banking Group holds no loans in portfolio, all loans originated or purchased by this segment are considered to be salable for management reporting purposes.
⁽⁴⁾: Represents the corporate offset for cost of capital related to goodwill that has been allocated to the segments.
⁽⁵⁾: Represents the tax effect of reconciling adjustments.
⁽⁶⁾: The efficiency ratio is defined as noninterest expense, excluding a cost of capital charge on goodwill, divided by total revenue (net interest income and noninterest income).
⁽⁷⁾: The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income).
⁽⁸⁾: Includes the inter-segment offset for inter-segment loan premiums that the Retail Banking and Financial Services Group recognized from the transfer of portfolio loans from the Mortgage Banking Group.
⁽⁹⁾: Includes the impact to the allowance for loan and lease losses of $163 million that results from the difference between the long-term, normalized net charge-off ratio used to assess expected loan and lease losses for the operating segments and the "losses inherent in the loan portfolio" methodology used by the Company.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Discontinued Operations

In January 2004, the Company sold its subsidiary, Washington Mutual Finance Corporation, for approximately $1.30 billion in cash. Accordingly, this former subsidiary is presented in this report as a discontinued operation with the results of operations and cash flows segregated from the Company's results of continuing operations for all periods presented on the Consolidated Statements of Income, Cash Flows and Notes to the Consolidated Financial Statements as well as the tables presented herein, unless otherwise noted.

Cautionary Statements

The Company's Form 10-Q and other documents that it files with the Securities and Exchange Commission ("SEC") have forward-looking statements. In addition, senior management may make forward-looking statements orally to analysts, investors, the media and others. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could" or "may."

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

•: Volatile interest rates impact the mortgage banking business and could adversely affect earnings;
•: Rising unemployment or a decrease in housing prices could adversely affect credit performance;
•: The potential for negative amortization in the Option ARM product could have an adverse affect on the Company's credit performance;
•: The Company faces competition from banking and nonbanking companies;
•: Changes in the regulation of financial services companies and housing government-sponsored enterprises could adversely affect business;
•: General business and economic conditions, including movements in interest rates, may significantly affect the Company's business activities and earnings; and
•: Negative public opinion could damage the Company's reputation and adversely affect earnings.

Overview

Net income from continuing operations for the first quarter of 2005 was $902 million, or $1.01 per diluted share, an increase from $648 million, or $0.73 per diluted share from continuing operations for the first quarter of 2004. Total net income during the first quarter of 2004 was $1.05 billion, or $1.18 per diluted share and included an after-tax gain of $399 million, or 45 cents per diluted share from discontinued operations from the sale of the Company's former subsidiary, Washington Mutual Finance Corporation.

Net interest income was $1.89 billion for the first quarter of 2005, compared with $1.73 billion for the first quarter of 2004. The increase was primarily due to growth in home equity loans and lines of credit and loans held-for-sale balances, which contributed to a 15% increase in average total interest-earning assets. Largely offsetting the growth in interest-earning assets was contraction in the net interest margin. The net interest margin in the first quarter of 2005 was 2.73%, a decline of 6 basis points from the fourth quarter of 2004 and 16 basis points from 2.89% in the first quarter of 2004. The decrease in the net interest margin was due to an increase in the cost of the Company's interest-bearing liabilities, which was driven by increases in short-term interest rates since June of 2004. As domestic economic indicators continued to strengthen during 2004 and into the first quarter of 2005, the Federal Reserve initiated a series of 25 basis point increases in the targeted federal funds rate to reduce the potential threat of inflation. This benchmark interest rate has increased from 1.00% in the second quarter of 2004 to 2.75% at the end of the first quarter of 2005. Since our adjustable-rate home loans and securities reprice to current market rates more slowly than our wholesale borrowing sources, the Company expects the net interest margin will contract further during 2005 as its interest-bearing assets and liabilities adjust to the higher interest rate environment. The contraction is likely to be more significant if the Federal Reserve accelerates the pace of further rate increases.

Partially mitigating the disparity in repricing speeds is the growth in home equity line of credit balances, which have repricing frequencies that are more closely aligned with the faster repricing behavior of the Company's wholesale borrowings. The average balance of home equity loans and lines of credit was $44.68 billion in the first quarter of 2005, an increase of $15.42 billion, or 53% from the first quarter of 2004, while the yield on this portfolio increased from 4.72% to 5.37% in these two quarterly periods. Additionally, during the first quarter of 2005, the Company restructured a portion of its available-for-sale securities portfolio by selling approximately $3 billion of lower-yielding debt securities and replacing those assets by the purchase of debt securities with comparatively higher yields. While the Company realized a loss of approximately $75 million on the sale of the lower-yielding securities, the positive effect on the margin of this restructuring will be realized beginning in the second quarter of 2005.

Home loan mortgage banking income was $776 million for the first quarter of 2005, an increase of $245 million from $531 million in the first quarter of 2004. The increase was primarily the result of higher gain from mortgage loans, net of risk management instruments, in the first quarter of 2005. The continuing customer demand for the Company's option adjustable-rate mortgage product ("Option ARM") and the improved liquidity of this product in the secondary market enabled the Company to direct approximately $10 billion (or 66%) of Option ARM volume for sale during the quarter, while still retaining a significant portion of the volume for the home loan portfolio. The increase was also the result of applying the interest rate lock accounting guidance issued in the first quarter of 2004 by the Securities and Exchange Commission. This guidance, which the Company implemented at the beginning of 2004, delayed the recognition of the servicing rights for loans that are being originated for sale until the loans are sold or securitized. This change in accounting reduced the gain from mortgage loans by approximately $100 million in the first quarter of 2004.

The continuing strength of the U.S. housing market and a modestly upward-sloping yield curve facilitated adjustable-rate mortgage growth in the total home loan portfolio. Total home loans held in portfolio increased from $129.13 billion at December 31, 2004 to $133.98 billion at March 31, 2005. In

addition to the strong demand for adjustable-rate mortgages, the Company also grew its portfolio of specialty mortgage finance home loans during the quarter. This portfolio, which totaled $15.44 billion at March 31, 2004, increased to $19.18 billion at December 31, 2004 and to $21.54 billion at March 31, 2005. Higher home equity loan and line of credit balances from loan volume that was generated through the Company's retail banking network and an increase in multi-family loan balances were also significant contributors to growth in the loan portfolio.

During the first quarter of 2005, the spread between short-term and long-term interest rates compressed, thus resulting in a flattening of the yield curve. Generally, as the yield curve flattens, fixed-rate mortgages become more attractive to U.S. consumers for the financing of home purchases. Additionally, consumers with existing adjustable-rate loans may refinance their mortgages into fixed-rate products. As the Company typically sells its fixed-rate loan production in the secondary market, the growth rate of the Company's home loan portfolio may be slower in future periods if the yield curve continues to flatten.

The provision for loan and lease losses was $16 million in the first quarter of 2005, compared with $56 million in the first quarter of 2004. During the first quarter of 2005, the Company benefited from the continuing positive trends in certain key domestic economic indicators that affect its credit risk profile. Those indicators included a stable and relatively low mortgage interest rate environment, continuing housing price appreciation in most of the Company's markets and a lower national unemployment rate. The $16 million provision that was recorded in the first quarter of 2005 was the result of a slight change in the mix of the Company's home loan portfolio toward its subprime lending programs. The Company's specialty mortgage finance portfolio, which is comprised of purchased subprime home loans and loans originated to subprime borrowers by the Company's wholly-owned subsidiary, Long Beach Mortgage Company, represented 16.1% of the total home loan portfolio at March 31, 2005, compared with 14.9% at December 31, 2004 and 12.8% at March 31, 2004.

The Company continues to grow its retail banking business by opening new stores and enhancing its array of products. During the first quarter of 2005, depositor and other retail banking fees increased 6% from the same period in the prior year, driven by an increase in the number of noninterest-bearing checking accounts as well as an increase in debit card interchange and ATM-related income. The number of noninterest-bearing checking accounts at March 31, 2005 totaled approximately 7.2 million, compared with approximately 6.7 million at March 31, 2004. Total retail deposit accounts, which consist of checking, savings and time deposit accounts for consumers and small businesses, increased by over 434,000 during the first quarter of 2005. Since the beginning of the year, the Company has opened 29 new stores, with a target of opening 250 stores within its existing markets during 2005.

Noninterest expense was $1.8 billion for the first quarter, a decrease of $100 million from the prior quarter and $41 million from the first quarter of 2004. This decrease is attributable to the Company's progress in productivity improvements and its continuous focus on expense management discipline.

Controls and Procedures

The Company's management, under the direction of the Company's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company's disclosure controls and procedures as of the end of the period covered by this report. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company's disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934.

Management reviews and evaluates the design and effectiveness of disclosure controls and procedures on an ongoing basis, and improves controls and procedures over time and corrects any deficiencies that may be discovered. While management believes the present design of the disclosure controls and

procedures is effective, future events affecting the Company may cause the disclosure controls and procedures to be modified.

There have not been any changes in the Company's internal controls over financial reporting during the first quarter of 2005 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. For additional discussion of the Company's internal controls over financial reporting, refer to the Company's 2004 Annual Report on Form 10-K, "Management's Report on Internal Control Over Financial Reporting."

Critical Accounting Policies

The preparation of financial statements, in accordance with accounting principles generally accepted in the United States of America, requires management to make a number of judgments, estimates and assumptions that affect the reported amount of assets, liabilities, income and expenses in the Consolidated Financial Statements and accompanying Notes to the Consolidated Financial Statements. The Company believes that the judgments, estimates and assumptions used in the preparation of its Consolidated Financial Statements are appropriate given the facts and circumstances as of March 31, 2005.

Various elements of the Company's accounting policies, by their nature, are inherently subject to estimation techniques, valuation assumptions and other subjective assessments. In particular, the Company has identified two accounting policies that, due to the judgments, estimates and assumptions inherent in those policies, and the sensitivity of its Consolidated Financial Statements to those judgments, estimates and assumptions, are critical to an understanding of its Consolidated Financial Statements. These policies relate to the valuation of its MSR and the methodology that determines its allowance for loan and lease losses.

Management has discussed the development and selection of these critical accounting policies with the Company's Audit Committee. These policies and the judgments, estimates and assumptions are described in greater detail in the Company's 2004 Annual Report on Form 10-K in the "Critical Accounting Policies" section of Management's Discussion and Analysis and in Note 1 to the Consolidated Financial Statements – "Summary of Significant Accounting Policies."

Recently Issued Accounting Standards

that revenue recognition is appropriate when cash is received from a third party if the distributor no longer has any continuing involvement or recourse associated with the rights. FSP EITF 85-24-1 must be applied for the quarter ended June 30, 2005. The Company is still in the process of evaluating the impact of the FSP; however, at this time the Company does not expect the impact to have a significant effect on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition.

In December 2004, the FASB issued a revised version of the original Statement No. 123, Accounting for Stock-Based Compensation. Statement No. 123R, Share-Based Payment, supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees. This Statement requires that the cost resulting from all share-based payment transactions be recognized in the financial statements. This Statement establishes fair value as the measurement objective in accounting for share-based payment arrangements and requires all entities to apply a fair value-based measurement method in accounting for share-based payment transactions with employees, except for equity instruments held by employee stock ownership plans. Effective January 1, 2003 and in accordance with the transitional guidance of Statement No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, the Company elected to prospectively apply the fair value method of accounting for stock-based awards granted subsequent to December 31, 2002. The Company will prospectively apply Statement No. 123R to its financial statements as of January 1, 2006. However, as the Company has already adopted Statement No. 148 and substantially all stock-based awards granted prior to its adoption will be fully vested by the end of this year, Statement No. 123R will not have a significant effect on the Consolidated Statements of Income or the Consolidated Statements of Financial Condition.

Summary Financial Data

				Three Months Ended March 31,
				2005			2004
				(dollars in millions, except per share amounts)
Profitability
	Net interest income			$	1,890		$	1,732
	Net interest margin				2.73	%		2.89	%
	Noninterest income			$	1,408		$	1,237
	Noninterest expense				1,839			1,880
	Net income				902			1,047
	Basic earnings per common share:
		Income from continuing operations		$	1.04		$	0.75
		Income from discontinued operations, net			–			0.46

			Net income		1.04			1.21
	Diluted earnings per common share:
		Income from continuing operations		$	1.01		$	0.73
		Income from discontinued operations, net			–			0.45

			Net income		1.01			1.18
	Basic weighted average number of common shares outstanding (in thousands)				864,933			863,299
	Diluted weighted average number of common shares outstanding (in thousands)				888,789			886,467
	Dividends declared per common share			$	0.46		$	0.42
	Return on average assets⁽¹⁾				1.17	%		1.54	%
	Return on average common equity⁽¹⁾				16.63			20.85
	Efficiency ratio⁽²⁾				55.77			63.34
Asset Quality
	Nonaccrual loans⁽³⁾⁽⁴⁾			$	1,569		$	1,542
	Foreclosed assets⁽⁴⁾				264			307

		Total nonperforming assets⁽³⁾⁽⁴⁾			1,833			1,849
	Nonperforming assets/total assets⁽³⁾⁽⁴⁾				0.57	%		0.66	%
	Restructured loans⁽⁴⁾			$	27		$	107

		Total nonperforming assets and restructured loans⁽³⁾⁽⁴⁾			1,860			1,956
	Allowance for loan and lease losses⁽⁴⁾				1,280			1,260
	Allowance as a percentage of total loans held in portfolio⁽⁴⁾				0.60	%		0.68	%
	Provision for loan and lease losses			$	16		$	56
	Net charge-offs				37			46
Capital Adequacy⁽⁴⁾
	Stockholders' equity/total assets				6.81	%		7.26	%
	Tangible common equity⁽⁵⁾/total tangible assets⁽⁵⁾				5.03			5.21
	Estimated total risk-based capital/risk-weighted assets⁽⁶⁾				11.21			10.53
Per Common Share Data
	Book value per common share⁽⁴⁾⁽⁷⁾			$	24.98		$	23.62
	Market prices:
		High			42.55			45.28
		Low			38.96			39.61
		Period end			39.50			42.71

⁽¹⁾: Includes income from continuing and discontinued operations for the period ending March 31, 2004.
⁽²⁾: The efficiency ratio is defined as noninterest expense divided by total revenue (net interest income and noninterest income).
⁽³⁾: Excludes nonaccrual loans held for sale.
⁽⁴⁾: As of quarter end.
⁽⁵⁾: Excludes unrealized net gain/loss on available-for-sale securities and derivatives, goodwill and intangible assets, but includes MSR.
⁽⁶⁾: Estimate of what the total risk-based capital ratio would be if Washington Mutual, Inc. were a bank holding company that is subject to Federal Reserve Board capital requirements.
⁽⁷⁾: Excludes 6 million shares held in escrow at March 31, 2005 and 2004.

Summary Financial Data (Continued)

					Three Months Ended March 31,
					2005		2004
					(dollars in millions)
Supplemental Data
	Average balance sheet:
		Total loans held for sale			$	38,307	$	24,464
		Total loans held in portfolio				207,320		180,263
		Total interest-earning assets				277,080		239,979
		Total assets				308,172		271,406
		Total interest-bearing deposits				142,639		123,336
		Total noninterest-bearing deposits				32,546		30,618
		Total stockholders' equity				21,680		20,088
	Period-end balance sheet:
		Loans held for sale				41,197		34,207
		Loans held in portfolio, net of allowance for loan and lease losses				212,834		185,120
		Total assets				319,696		280,768
		Total deposits				183,631		160,981
		Total stockholders' equity				21,767		20,383
	Loan volume:
		Home loans:
			Adjustable rate			22,947		21,822
			Fixed rate			17,147		21,564
			Specialty mortgage finance⁽¹⁾			7,656		7,113
				Total home loan volume		47,750		50,499
		Total loan volume				59,515		62,165
		Home loan refinancing⁽²⁾				28,641		33,233
		Total refinancing⁽²⁾				29,703		34,927

⁽¹⁾: Represents purchased subprime loan portfolios and mortgages originated by Long Beach Mortgage Company.
⁽²⁾: Includes loan refinancing entered into by both new and pre-existing loan customers.

Earnings Performance from Continuing Operations

Net Interest Income

Net interest income increased $158 million, or 9%, for the three months ended March 31, 2005, compared with the same period in 2004. The increase resulted from growth in home equity loans and lines of credit and loans held for sale balances, which contributed to a 15% increase in average total interest-earning assets. The growth in interest-earning assets was partially offset by compression in the net interest margin, which was 2.73% during the first quarter of 2005, down 16 basis points from 2.89% during the first quarter of 2004. Compression in the net interest margin was due primarily to an increase in the cost of funds from wholesale borrowings and Platinum checking and savings accounts, which outpaced the increase in yields from interest-earning assets.

Interest rate contracts, including embedded derivatives, held for asset/liability interest rate risk management purposes increased net interest income by $17 million for the three months ended March 31, 2005, compared with a decrease of $123 million for the same period in 2004.

Detailed 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 March 31,
					2005						2004
					Average Balance		Rate		Interest Income		Average Balance		Rate		Interest Income
					(dollars in millions)
Assets
Interest-earning assets:
	Federal funds sold and securities purchased under agreements to resell				$	1,354	2.55	%	$	9	$	1,026	1.34	%	$	3
	Trading securities					5,713	5.55			79		1,228	7.91			24
	Available-for-sale securities⁽¹⁾:
		Mortgage-backed securities				15,487	4.45			173		9,999	4.35			109
		Investment securities				4,627	4.44			51		19,073	3.29			156
	Loans held for sale⁽²⁾					38,307	4.91			470		24,464	5.43			332
	Loans held in portfolio⁽²⁾⁽³⁾:
		Loans secured by real estate:
			Home			110,131	4.59			1,263		102,691	4.24			1,089
			Specialty mortgage finance⁽⁴⁾			18,554	5.05			234		14,016	5.21			182

				Total home loans		128,685	4.65			1,497		116,707	4.36			1,271
			Home equity loans and lines of credit			44,679	5.37			593		29,262	4.72			344
			Home construction⁽⁵⁾			2,242	5.77			32		2,317	5.33			31
			Multi-family			22,667	5.00			283		20,376	5.06			258
			Other real estate			5,425	6.02			82		6,589	5.77			95

				Total loans secured by real estate		203,698	4.90			2,487		175,251	4.57			1,999
		Consumer				770	10.50			20		997	10.15			25
		Commercial business				2,852	5.19			37		4,015	4.19			43

				Total loans held in portfolio		207,320	4.92			2,544		180,263	4.59			2,067
	Other					4,272	3.21			34		3,926	3.00			30

				Total interest-earning assets		277,080	4.86			3,360		239,979	4.54			2,721
Noninterest-earning assets:
	Mortgage servicing rights					6,090						5,872
	Goodwill					6,196						6,196
	Other assets					18,806						19,359

				Total assets	$	308,172					$	271,406

(This table is continued on the next page.)

⁽¹⁾: The average balance and yield are based on average amortized cost balances.
⁽²⁾: Nonaccrual loans and related income, if any, are included in their respective loan categories.
⁽³⁾: Interest income for loans held in portfolio includes amortization of net deferred loan origination costs of $78 million and $73 million for the three months ended March 31, 2005 and 2004.
⁽⁴⁾: Represents purchased subprime loan portfolios and certain mortgages originated by Long Beach Mortgage Company.
⁽⁵⁾: Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale and construction loans made directly to the intended occupant of a single-family residence.

(Continued from the previous page.)

				Three Months Ended March 31,
				2005						2004
				Average Balance		Rate		Interest Expense		Average Balance		Rate		Interest Expense
				(dollars in millions)
Liabilities
Interest-bearing liabilities:
	Deposits:
		Interest-bearing checking deposits		$	49,917	1.63	%	$	201	$	67,431	1.28	%	$	214
		Savings and money market deposits			41,997	1.42			147		26,915	0.75			50
		Time deposits			50,725	2.77			348		28,990	2.48			179

			Total interest-bearing deposits		142,639	1.97			696		123,336	1.45			443
	Federal funds purchased and commercial paper				3,486	2.49			22		3,493	1.08			10
	Securities sold under agreements to repurchase				16,621	2.65			110		21,954	1.93			107
	Advances from Federal Home Loan Banks				66,591	2.82			469		52,921	2.28			305
	Other				18,400	3.78			173		14,032	3.56			124

			Total interest-bearing liabilities		247,737	2.39			1,470		215,736	1.83			989

Noninterest-bearing sources:
	Noninterest-bearing deposits				32,546						30,618
	Other liabilities				6,209						4,964
	Stockholders' equity				21,680						20,088

			Total liabilities and stockholders' equity	$	308,172					$	271,406

Net interest spread and net interest income						2.47		$	1,890			2.71		$	1,732

Impact of noninterest-bearing sources						0.26						0.18
Net interest margin						2.73						2.89

Noninterest Income

Noninterest income from continuing operations consisted of the following:

					Three Months Ended March 31,
					Three Months Ended March 31,						Percentage Change
					2005			2004			Percentage Change
					(in millions)
Home loan mortgage banking income (expense):
	Loan servicing income (expense):
		Loan servicing fees			$	489		$	502		(3	)%
		Amortization of MSR				(570	)		(750	)	(24	)
		MSR valuation adjustments:
			Statement No. 133 MSR accounting valuation adjustments			545			–		–
			Statement No. 133 fair value hedging adjustments⁽¹⁾			(433	)		–		–

				MSR net ineffectiveness under Statement No. 133		112			–		–
			MSR lower of cost or market adjustment			427			(606	)	–

				Net MSR valuation adjustments		539			(606	)	–
		Other, net⁽²⁾				(51	)		(66	)	(22	)

				Net home loan servicing income (expense)		407			(920	)	–
	Revaluation gain from derivatives					63			1,042		(94	)
	Net settlement income from certain interest-rate swaps					51			167		(69	)
	Gain from mortgage loans					178			171		4
	Loan related income					74			71		5
	Gain from sale of originated mortgage-backed securities					3			–		–

				Total home loan mortgage banking income		776			531		46
Depositor and other retail banking fees						490			463		6
Securities fees and commissions						110			107		3
Insurance income						46			61		(24	)
Portfolio loan related income						85			87		(2	)
Trading securities income (loss)						(89	)		8		–
Gain (loss) from other available-for-sale securities						(122	)		21		–
Loss on extinguishment of borrowings						–			(89	)	(100	)
Other income						112			48		125

				Total noninterest income	$	1,408		$	1,237		14

⁽¹⁾: Represents changes in fair value of derivatives designated as MSR fair value hedges.
⁽²⁾: Includes loan pool expenses, which represent the shortfall of the scheduled interest required to be remitted to investors compared to what is collected from the borrowers upon payoff.

Home Loan Mortgage Banking Income

The following table presents the aggregate valuation adjustments for the MSR and the corresponding hedging and risk management derivative instruments and securities, and amortization of the MSR during the three months ended March 31, 2005 and 2004:

				Three Months Ended March 31,
				2005			2004
				(dollars in millions)
Statement No. 133 MSR accounting valuation adjustments				$	545		$	–
Statement No. 133 fair value hedging adjustment⁽¹⁾					(433	)		–

	MSR net ineffectiveness under Statement No. 133				112			–
Change in value of MSR accounted for under lower of cost or market value methodology					427			(606	)

		Net MSR valuation adjustments			539			(606	)
MSR risk management:
	Revaluation gain (loss) from derivatives				(23	)		1,108
	Net settlement income from certain interest-rate swaps				58			160
	Gain (loss) from securities				(153	)		5

			Net valuation change in hedging and risk management instruments		421			667
Amortization of MSR					(570	)		(750	)

			Total change in MSR valuation, net of hedging and risk management instruments and amortization	$	(149	)	$	(83	)

⁽¹⁾: Represents changes in fair value of derivatives designated as MSR fair value hedges.

Several factors affected the results of the total change in MSR valuation, net of hedging and risk management instruments and amortization, when comparing the first quarter of 2005 to the first quarter of 2004. The Company did not apply Statement No. 133 fair value hedge accounting to its MSR asset until April 1, 2004. As such, the risk management results for the first quarter of 2004 entirely reflect the performance of economic hedges, which were substantially comprised of derivative instruments. The results for the first quarter of 2005 reflect the application of fair value hedge accounting to most of the MSR asset. This results in the netting of changes in fair value of the hedged MSR with the changes in fair value of the hedging derivative, to the extent the hedge relationship is determined to be highly effective. Gains and losses from derivative instruments used as economic hedges are not netted with the change in value of the MSR and are instead reported in the "revaluation gain (loss) from derivatives' line item, which is notably larger in the first quarter of 2004 due, in part, to the difference in accounting treatment applied in the two periods. Additionally, during the latter part of 2004, the Company altered the composition of its MSR hedging and risk management instruments in order to reduce its exposure to basis risk by purchasing available-for-sale and trading mortgage-backed securities, while reducing its reliance on interest rate swaps. As these securities are non-derivative financial instruments, they cannot be designated as fair value hedging instruments under Statement No. 133 and thus represent economic hedges that are included in the above table as MSR risk management components.

The following tables separately present the risk management results associated with the economic hedges of MSR, loans held for sale and other risk management activities included within noninterest income during the three months ended March 31, 2005 and 2004:

			Three Months Ended March 31, 2005
			MSR			Loans Held for Sale			Other			Total
			(in millions)
Revaluation gain (loss) from derivatives			$	(23	)	$	86		$	–		$	63
Net settlement income (loss) from certain interest-rate swaps				58			(7	)		–			51
Gain (loss) from securities:
	Loss from other available-for-sale securities			(44	)		–			(78	)		(122	)
	Trading securities income (loss)			(109)	⁽¹⁾		–			20			(89	)

		Total	$	(118	)	$	79		$	(58	)	$	(97	)

⁽¹⁾: Represents revaluation gains (losses) from mortgage-backed securities, including those that are principal-only.

			Three Months Ended March 31, 2004
			MSR		Loans Held for Sale			Other		Total
			(in millions)
Revaluation gain (loss) from derivatives			$	1,108	$	(66	)	$	–	$	1,042
Net settlement income from certain interest-rate swaps				160		7			–		167
Gain from securities:
	Gain from other available-for-sale securities			5		–			16		21

		Total	$	1,273	$	(59	)	$	16	$	1,230

"Other net" home loan servicing expense declined from $66 million in the first quarter of 2004 to $51 million in the first quarter of 2005. The decrease was the result of lower levels of refinancing activity in the first quarter of 2005, which led to lower loan pool expense in that quarter. When loans that have been sold to investors are prepaid, certain pools governed by the requirements of the pooling and servicing agreements stipulate that the Company remit a full month of interest to those investors during the month when a loan has prepaid, even though the borrower only pays interest through the payoff date. Pool expense represents the shortfall of what is remitted to those investors compared to what is collected from the borrowers.

The Company recorded gain from mortgage loans, net of hedging and risk management instruments, of $257 million in the first quarter of 2005 compared with a net gain of $112 million for the same period in 2004, which was reduced by approximately $100 million as a result of the one-time effect of the Company's change in accounting for gain from mortgage loans in the first quarter of 2004. The increase in gain from mortgage loans, net of hedging and risk management instruments, was a result of the sale of the Company's Option ARM product, as strong customer demand for this product allowed the Company to direct a larger portion of these loans to held-for-sale to the secondary market.

The fair value changes in loans held for sale and the offsetting changes in the derivative instruments used as fair value hedges are recorded within gain from mortgage loans when hedge accounting treatment is achieved. Loans held for sale where hedge accounting treatment is not achieved ("nonqualifying" loans held for sale) are recorded at the lower of cost or market value. Due to changes in the fair value of derivatives acquired to mitigate the risk of fair value changes to these nonqualifying loans, a net gain of $86 million was recognized as revaluation gain/loss from derivatives during the three months ended March 31, 2005, compared with a net loss of $66 million during the same period in 2004. A gain may be

recognized when the loans are subsequently sold if the fair value of those loans is higher than the carrying amount.

In evaluating the MSR for impairment, loans are stratified in the servicing portfolio based on loan type and coupon rate. An impairment valuation allowance for a stratum is recorded when, and in the amount by which, its fair value is less than its gross carrying value. A reversal of the impairment allowance for a stratum is recorded when its fair value exceeds its net carrying value. However, a reversal in any particular stratum cannot exceed its valuation allowance. At March 31, 2005, loans in the servicing portfolio were stratified as follows:

				March 31, 2005
			Rate Band	Gross Carrying Value		Valuation Allowance		Net Carrying Value		Fair Value
				(in millions)
Primary Servicing:
	Adjustable		All loans	$	1,375	$	83	$	1,292	$	1,292
	Government-sponsored enterprises		6.00% and below		3,031		345		2,686		2,686
	Government-sponsored enterprises		6.01% to 7.49%		1,405		549		856		856
	Government-sponsored enterprises		7.50% and above		150		51		99		99
	Government		6.00% and below		518		84		434		434
	Government		6.01% to 7.49%		492		191		301		301
	Government		7.50% and above		176		66		110		110
	Private		6.00% and below		510		18		492		492
	Private		6.01% to 7.49%		269		92		177		177
	Private		7.50% and above		77		21		56		56

		Total primary servicing			8,003		1,500		6,503		6,503
Master servicing			All loans		114		7		107		107
Subprime			All loans		162		6		156		156
Multi-family			All loans		36		–		36		40

		Total		$	8,315	$	1,513	$	6,802	$	6,806

At March 31, 2005, key economic assumptions and the sensitivity to immediate changes in those assumptions of the fair value of home loan MSRs were as follows:

		March 31, 2005
		Mortgage Servicing Rights
		Fixed-Rate Mortgage Loans						Adjustable-Rate Mortgage Loans
		Government and Government- Sponsored Enterprise			Privately Issued			All Types
		(dollars in millions)
Fair value of home loan MSR		$	4,486		$	725		$	1,292
Expected weighted-average life (in years)			4.8			4.7			2.8
Constant prepayment rate⁽¹⁾			15.34	%		16.45	%		28.85	%
	Impact on fair value of 25% decrease	$	719		$	121		$	283
	Impact on fair value of 50% decrease		1,674			283			712
	Impact on fair value of 25% increase		(559	)		(94	)		(201	)
	Impact on fair value of 50% increase		(1,005	)		(170	)		(354	)
Discounted cash flow rate			8.54	%		10.06	%		9.88	%
	Impact on fair value of 25% decrease	$	350		$	62		$	71
	Impact on fair value of 50% decrease		767			138			154
	Impact on fair value of 25% increase		(298	)		(52	)		(63	)
	Impact on fair value of 50% increase		(554	)		(95	)		(119	)

⁽¹⁾: Represents the expected lifetime average.

These sensitivities are hypothetical and should be used with caution. As the table above demonstrates, the Company's methodology for estimating the fair value of MSR is highly sensitive to changes in assumptions. For example, the Company's determination of fair values 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 resulting from changes 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 2004 Annual Report on Form 10-K for further discussion of how MSR fair value is measured.

All Other Noninterest Income Analysis

The increase in depositor and other retail banking fees in the first quarter of 2005, as compared with the same period in 2004, was largely due to increased debit card interchange and ATM related income and higher volumes of checking fees that resulted from the increase in the number of noninterest-bearing checking accounts. The number of noninterest-bearing checking accounts at March 31, 2005 totaled approximately 7.2 million, compared with approximately 6.7 million at March 31, 2004.

During the first quarter of 2004, the Company terminated certain pay-fixed swaps hedging variable rate Federal Home Loan Bank ("FHLB") advances, resulting in a loss of $89 million. This transaction had the immediate effect of reducing the Company's wholesale borrowing costs.

Other income increased in the first quarter of 2005, as compared with 2004 primarily due to the sale of a real estate investment property, which resulted in a gain of $59 million.

Noninterest Expense

Noninterest expense from continuing operations consisted of the following:

		Three Months Ended March 31,
		Three Months Ended March 31,				Percentage Change
		2005		2004		Percentage Change
		(in millions)
Compensation and benefits		$	876	$	899	(3	)%
Occupancy and equipment			402		400	–
Telecommunications and outsourced information services			104		123	(15	)
Depositor and other retail banking losses			55		40	37
Advertising and promotion			55		58	(6	)
Professional fees			34		39	(12	)
Postage			63		58	10
Loan expense			23		28	(19	)
Other expense			227		235	(4	)

	Total noninterest expense	$	1,839	$	1,880	(2	)

Telecommunications and outsourced information services expense decreased for the three months ended March 31, 2005, compared with the same period in 2004 largely due to negotiated reductions in vendor charges, reduced call center volume, and lower costs due to the consolidation of information system platforms.

The increase in depositor and other retail banking losses for the three months ended March 31, 2005, was primarily due to an increase in debit card and check fraud.

Review of Financial Condition

Assets

At March 31, 2005, assets increased from year-end primarily due to an increase in loans held in portfolio, partially offset by a decrease in loans held for sale.

Securities

Securities consisted of the following:

				March 31, 2005
				Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
				(in millions)
Available-for-sale securities
Mortgage-backed securities:
	U.S. Government			$	137	$	–	$	(2	)	$	135
	Agency				12,079		130		(70	)		12,139
	Private issue				3,592		82		(1	)		3,673

		Total mortgage-backed securities			15,808		212		(73	)		15,947
Investment securities:
	U.S. Government				442		–		(1	)		441
	Agency				3,726		51		(68	)		3,709
	Other debt securities				498		14		(3	)		509
	Equity securities				95		2		–			97

		Total investment securities			4,761		67		(72	)		4,756

			Total available-for-sale securities	$	20,569	$	279	$	(145	)	$	20,703

				December 31, 2004
				Amortized Cost		Unrealized Gains		Unrealized Losses			Fair Value
				(in millions)
Available-for-sale securities
Mortgage-backed securities:
	U.S. Government			$	149	$	–	$	(1	)	$	148
	Agency				12,938		133		(24	)		13,047
	Private issue				1,702		27		(1	)		1,728

		Total mortgage-backed securities			14,789		160		(26	)		14,923
Investment securities:
	U.S. Government				994		–		(18	)		976
	Agency				2,796		36		(4	)		2,828
	Other debt securities				373		18		–			391
	Equity securities				95		7		(1	)		101

		Total investment securities			4,258		61		(23	)		4,296

			Total available-for-sale securities	$	19,047	$	221	$	(49	)	$	19,219

The realized gross gains and losses of securities for the periods indicated were as follows:

		Three Months Ended March 31,
		2005			2004
		(in millions)
Available-for-sale securities
Realized gross gains		$	33		$	75
Realized gross losses			(152	)		(54	)

	Realized net gain (loss)	$	(119	)	$	21

Loans

Loans held in portfolio consisted of the following:

				March 31, 2005		December 31, 2004
				(in millions)
Loans secured by real estate:
	Home			$	112,444	$	109,950
	Specialty mortgage finance⁽¹⁾				21,539		19,184

		Total home loans			133,983		129,134
	Home equity loans and lines of credit				45,849		43,650
	Home construction⁽²⁾				2,170		2,344
	Multi-family				23,247		22,282
	Other real estate				5,311		5,664

		Total loans secured by real estate			210,560		203,074
Consumer					747		792
Commercial business					2,807		3,205

			Total loans held in portfolio	$	214,114	$	207,071

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

Loans held in portfolio increased predominantly due to an increase in adjustable-rate home loans and home equity loans and lines of credit. Short-term adjustable-rate home loans (excluding specialty mortgage finance loans) increased from $70.56 billion at December 31, 2004 to $72.62 billion at March 31, 2005. These balances were substantially comprised of Option ARM loans.

Other Assets

Other assets consisted of the following:

		March 31, 2005		December 31, 2004
		(in millions)
Premises and equipment		$	3,042	$	3,140
Investment in bank-owned life insurance			2,702		2,678
Accrued interest receivable			1,700		1,428
Foreclosed assets			264		261
Other intangible assets			181		195
Derivatives			1,126		893
Accounts receivable			5,382		3,917
Other			1,565		1,388

	Total other assets	$	15,962	$	13,900

Substantially all of the increase in accounts receivable was due to the timing of the sale of available-for-sale securities which had not yet settled with the counterparties.

Deposits

Deposits consisted of the following:

				March 31, 2005		December 31, 2004
				(in millions)
Retail deposits:
	Checking deposits:
		Noninterest bearing		$	18,599	$	17,463
		Interest bearing			48,988		51,099

			Total checking deposits		67,587		68,562
	Savings and money market deposits				35,184		36,836
	Time deposits				31,819		27,268

			Total retail deposits		134,590		132,666
Commercial business deposits					8,447		7,611
Wholesale deposits					24,969		18,448
Custodial and escrow deposits⁽¹⁾					15,625		14,933

			Total deposits	$	183,631	$	173,658

⁽¹⁾: Substantially all custodial and escrow deposits reside in noninterest-bearing checking accounts.

The increase in noninterest-bearing retail checking deposits was driven by an increase in the number of individual and small business checking accounts. Interest-bearing checking, savings and money market deposits decreased as customers shifted from Platinum checking and savings accounts to time deposits. The increase in time deposits reflects renewed customer interest as a result of higher interest rates offered for these products. Wholesale deposits increased 35% from year-end 2004, due predominantly to an increase in institutional investor certificates of deposits. The Company continued to balance its mix of funding sources between wholesale deposits and other borrowings such as FHLB advances and securities sold under agreements to repurchase ("repurchase agreements").

Transaction accounts (checking, savings and money market deposits) comprised 76% of retail deposits at March 31, 2005, compared with 79% at year-end 2004. These products generally have the benefit of lower interest costs, compared with time deposits. These products represent the core customer relationship that is maintained within the retail banking franchise. At March 31, 2005, deposits funded 57% of total assets, compared with 56% at December 31, 2004.

Borrowings

At March 31, 2005, the Company's borrowings were largely comprised of advances from the FHLBs of San Francisco and Seattle and repurchase agreements. Advances from the San Francisco FHLB represented 87% of total FHLB advances at March 31, 2005. The mix of borrowing sources at any given time is dependent on market conditions.

Operating Segments

The Company has three operating segments for the purpose of management reporting: the Retail Banking and Financial Services Group, the Mortgage Banking Group and the Commercial Group. Refer to Note 7 to the Consolidated Financial Statements – "Operating Segments" for information regarding the key elements of management reporting methodologies used to measure segment performance.

The Company serves the needs of its 11.7 million consumer households through multiple distribution channels including 1,968 retail banking stores, 484 lending stores and centers, 3,389 ATMs, correspondent lenders, telephone call centers and online banking.

Financial highlights by operating segment were as follows:

Retail Banking and Financial Services Group

			Three Months Ended March 31,
			Three Months Ended March 31,						Percentage Change
			2005			2004			Percentage Change
			(in millions)
Condensed income statement:
	Net interest income		$	1,343		$	1,187		13	%
	Provision for loan and lease losses			37			58		(37	)
	Noninterest income			695			623		11
	Inter-segment revenue			12			6		108
	Noninterest expense			1,148			1,071		7

	Income before income taxes			865			687		26
	Income taxes			327			260		26

		Net income	$	538		$	427		26

Performance and other data:
	Efficiency ratio⁽¹⁾			49.78	%		51.86	%	(4	)
	Average loans		$	177,635		$	149,377		19
	Average assets			190,479			161,359		18
	Average deposits			132,982			128,000		4
	Loan volume			12,493			12,778		(2	)
	Employees at end of period			31,152			29,077		7

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

The increase in net interest income was primarily due to higher average balances of home loans and home equity loans and lines of credit, substantially offset by higher funding costs resulting from increasing interest rates. Average home loans increased $8.50 billion, or 8%, and average home equity loans and lines of credit increased $15.42 billion, or 53%, compared with the first quarter of 2004.

The increase in noninterest income was primarily due to growth in depositor and other retail banking fees that resulted from growth in the number of retail checking accounts, higher debit card interchange and ATM-related fees, and an $11 million member distribution resulting from the merger of Pulse EFT Association into Discover Financial Services. Noninterest-bearing retail checking accounts totaled approximately 7 million at March 31, 2005, a 9% increase from March 31, 2004.

The increase in noninterest expense was primarily due to higher employee compensation and benefits expense and occupancy and equipment expense, all of which resulted from the continued expansion of the Group's distribution network, which included the opening of 29 net new retail banking stores in the first quarter of 2005 and a total of 213 net new retail banking stores in the preceding twelve months.

Mortgage Banking Group

			Three Months Ended March 31,
			Three Months Ended March 31,						Percentage Change
			2005			2004			Percentage Change
			(in millions)
Condensed income statement:
	Net interest income		$	286		$	288		(1	)%
	Noninterest income			682			761		(10	)
	Inter-segment expense			12			6		108
	Noninterest expense			566			677		(16	)

	Income before income taxes			390			366		7
	Income taxes			147			138		7

		Net income	$	243		$	228		7

Performance and other data:
	Efficiency ratio⁽¹⁾			53.83	%		59.98	%	(10	)
	Average loans		$	27,765		$	19,871		40
	Average assets			49,019			38,914		26
	Average deposits			13,107			14,877		(12	)
	Loan volume			38,498			43,720		(12	)
	Employees at end of period			12,626			21,203		(40	)

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

Net interest income was flat in the first quarter of 2005, compared with the same period in 2004, as increased income from higher average balances of loans held for sale and investment securities was substantially offset by higher funding costs due to increasing interest rates.

The decline in noninterest income was predominantly due to lower loan volume, which resulted in a decline of inter-segment gains from the sale of mortgage loans to the Retail Banking and Financial Services Group, and losses from mortgage-backed securities designated as MSR risk management instruments.

The decrease in noninterest expense was largely due to lower employee compensation and benefits expense, technology expense and occupancy and equipment expense, compared with the first quarter of 2004. These decreases resulted from the consolidation of various locations and functions, the conversion to a single loan servicing platform and headcount reductions, which decreased to 12,626 at March 31, 2005 from 21,203 at March 31, 2004.

Commercial Group

			Three Months Ended March 31,
			Three Months Ended March 31,						Percentage Change
			2005			2004			Percentage Change
			(in millions)
Condensed income statement:
	Net interest income		$	323		$	343		(6	)%
	Provision for loan and lease losses			2			16		(89	)
	Noninterest income			158			86		84
	Noninterest expense			175			156		12

	Income before income taxes			304			257		18
	Income taxes			104			90		15

		Net income	$	200		$	167		20

Performance and other data:
	Efficiency ratio⁽¹⁾			30.36	%		29.57	%	3
	Average loans		$	41,783		$	36,984		13
	Average assets			46,647			42,805		9
	Average deposits			7,308			6,049		21
	Loan volume			8,524			5,667		50
	Employees at end of period			3,530			3,130		13

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

The decrease in net interest income resulted largely from higher funding costs due to the increasing rate environment, primarily offset by increased interest income from higher average balances of multi-family loans and home loans.

The increase in noninterest income was primarily due to a $59 million pretax gain on the sale of a real estate investment property during the first quarter of 2005.

The increase in noninterest expense was primarily due to higher employee compensation and benefits expense and loan servicing expense resulting from the growth in loan volume from Long Beach Mortgage Company. The number of employees in this entity increased by approximately 700 during the previous twelve months.

The increase in average deposits was due to growth in Mortgage Banker Finance customer deposits.

Corporate Support/Treasury and Other

			Three Months Ended March 31,
			Three Months Ended March 31,						Percentage Change
			2005			2004			Percentage Change
			(in millions)
Condensed income statement:
	Net interest income (expense)		$	(175	)	$	(189	)	(8	)%
	Noninterest income (expense)			(65	)		(69	)	(6	)
	Noninterest expense			158			186		(15	)

	Loss from continuing operations before income taxes			(398	)		(444	)	(10	)
	Income tax benefit			(149	)		(165	)	(10	)

	Loss from continuing operations			(249	)		(279	)	(11	)
	Income from discontinued operations, net of taxes			–			399		(100	)

		Net income (loss)	$	(249	)	$	120		–

Performance and other data:
	Average assets		$	23,809		$	29,996		(21	)
	Average deposits			21,788			5,028		333
	Employees at end of period			5,180			5,763		(10	)

The decrease in noninterest expense was primarily due to lower restructuring and technology-related expenses from the Company's ongoing expense management efforts. All such expenses are charged to this unit.

The increase in average deposits was predominantly due to growth in brokered certificates of deposits held by institutional investors.

Income from discontinued operations resulted from the sale of the Company's subsidiary, Washington Mutual Finance Corporation, in the first quarter of 2004.

Risk Management

The Company is exposed to four major categories of risk: credit, liquidity, market and operational.

The Company's Chief Enterprise Risk Officer is responsible for enterprise-wide risk assessment. The Company's Enterprise Risk Management function oversees the identification, measurement, monitoring, control and reporting of credit, market and operational risks. The Company's Treasury function is responsible for the measurement, management and control of liquidity risk. The Internal Audit function, which reports to the Audit Committee of the Board of Directors, provides independent assessment of the Company's compliance with risk management controls, policies and procedures.

Enterprise Risk Management works with the lines of business to establish appropriate policies, standards and limits designed to maintain risk exposures within the Company's risk tolerance. Significant risk management policies approved by the relevant management committees are also reviewed and approved by the Audit and Finance Committees of the Board of Directors. Enterprise Risk Management also provides objective oversight of risk elements inherent in the Company's business activities and practices and oversees compliance with laws and regulations.

Business lines are responsible for determining and executing business strategies that may give rise to one or more types of risk; their return on economic and other forms of capital is measured and compared to targets with the overall objective of ensuring that the risk/reward balance is acceptable. Business lines, Enterprise Risk Management and Treasury divide the responsibilities of conducting measurement and monitoring of the Company's risk exposures. Risk exceptions, depending on their type and significance, are elevated to management or Board committees responsible for oversight.

Credit Risk Management

Credit risk is the risk of loss arising from adverse changes in a borrower's ability to meet its financial obligations under agreed upon terms and exists primarily in lending and derivative portfolios. The degree of credit risk will vary based on many factors, including the size of the asset or transaction, the credit characteristics of the borrower, the contractual terms of the agreement and the availability and quality of collateral.

Credit risk management is based on analyzing the creditworthiness of the borrower, the adequacy of underlying collateral given current events and conditions and the existence and strength of any guarantor support. Trends in these factors are dynamic and are reflected in the tables and commentary that follow.

Nonaccrual Loans, Foreclosed Assets and Restructured Loans

Loans are generally placed on nonaccrual status upon reaching 90 days past due. Additionally, loans in non-homogeneous portfolios are placed on nonaccrual status prior to becoming 90 days past due when payment in full of principal or interest is not expected. Management's classification of a loan as nonaccrual or restructured does not necessarily indicate that the principal or interest of the loan is uncollectible in whole or in part. Nonaccrual loans and foreclosed assets ("nonperforming assets") and restructured loans consisted of the following:

					March 31, 2005			December 31, 2004
					(dollars in millions)
Nonperforming assets and restructured loans:
	Nonaccrual loans⁽¹⁾:
		Loans secured by real estate:
			Home		$	495		$	534
			Specialty mortgage finance⁽²⁾			734			682

				Total home nonaccrual loans		1,229			1,216
			Home equity loans and lines of credit			74			66
			Home construction⁽³⁾			25			28
			Multi-family			15			12
			Other real estate			159			162

				Total nonaccrual loans secured by real estate		1,502			1,484
		Consumer				8			9
		Commercial business				59			41

				Total nonaccrual loans held in portfolio		1,569			1,534
	Foreclosed assets					264			261

				Total nonperforming assets	$	1,833		$	1,795
				As a percentage of total assets		0.57	%		0.58	%
	Restructured loans				$	27		$	34

				Total nonperforming assets and restructured loans	$	1,860		$	1,829

⁽¹⁾: Nonaccrual loans held for sale, which are excluded from the nonaccrual balances presented above, were $112 million and $76 million at March 31, 2005 and December 31, 2004.
⁽²⁾: Represents purchased subprime loan portfolios and certain mortgages originated by Long Beach Mortgage Company.
⁽³⁾: Represents loans to builders for the purpose of financing the acquisition, development and construction of single-family residences for sale and construction loans made directly to the intended occupant of a single-family residence.

Provision and Allowance for Loan and Lease Losses

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

					Three Months Ended March 31,
					2005			2004
					(dollars in millions)
Balance, beginning of period					$	1,301		$	1,250
Provision for loan and lease losses						16			56

						1,317			1,306
Loans charged off:
	Loans secured by real estate:
		Home				(11	)		(16	)
		Specialty mortgage finance⁽¹⁾				(10	)		(9	)

				Total home loans charged off		(21	)		(25	)
		Home equity loans and lines of credit				(5	)		(7	)
		Home construction⁽²⁾				–			(1	)
		Other real estate				(1	)		(8	)

				Total loans secured by real estate		(27	)		(41	)
	Consumer					(13	)		(14	)
	Commercial business					(6	)		(6	)

				Total loans charged off		(46	)		(61	)
Recoveries of loans previously charged off:
	Loans secured by real estate:
		Specialty mortgage finance⁽¹⁾				1			1
		Home equity loans and lines of credit				–			1
		Multi-family				–			2
		Other real estate				1			2

				Total loans secured by real estate		2			6
	Consumer					5			5
	Commercial business					2			4

			Total recoveries of loans previously charged off			9			15

				Net charge-offs		(37	)		(46	)

Balance, end of period					$	1,280		$	1,260

Net charge-offs (annualized) as a percentage of average loans held in portfolio						0.07	%		0.10	%
Allowance as a percentage of total loans held in portfolio						0.60			0.68

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

During the first quarter of 2005, a number of indicators that affect the risk of credit loss in the Company's loan portfolio improved or sustained the improvements observed during 2004. Total net charge-offs were $37 million, representing an annualized 0.07% of the portfolio. These results compare to $46 million and 0.10%, respectively, during the first quarter of 2004.

The allowance for loan and lease losses represents management's estimate of incurred credit losses inherent in the Company's loan and lease portfolios as of the balance sheet date. The estimation of the allowance is based on a variety of factors, including past loan loss experience, the current credit profile of borrowers, adverse situations that have occurred that may affect the borrowers' ability to repay, the estimated value of underlying collateral, the interest rate climate as it affects adjustable-rate loans and general economic conditions.

In determining the allowance for loan and lease losses, the Company allocates a portion of the allowance to its various loan product categories based on an analysis of individual loans and pools of loans. The tools utilized for this determination include statistical forecasting models that estimate the default and loss outcomes based on an evaluation of past performance of loans in the Company's portfolio and other factors as well as industry historical loss data (primarily for homogeneous loan portfolios). Non-homogeneous loans are individually reviewed and assigned loss factors commensurate with the applicable level of estimated risk.

Refer to Note 1 to the Consolidated Financial Statements – "Summary of Significant Accounting Policies" in the Company's 2004 Annual Report on Form 10-K for further discussion of the Allowance for Loan and Lease Losses.

90 or More Days Past Due

Loans held in portfolio that were 90 or more days contractually past due and still accruing interest were $94 million and $85 million at March 31, 2005 and December 31, 2004. The majority of these loans are either VA- or FHA-insured with little or no risk of loss of principal or interest.

Liquidity Risk Management

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 its other obligations on a timely and cost-effective basis. The Company establishes liquidity guidelines for the parent holding company, Washington Mutual, Inc., as well as for its principal operating subsidiaries. The Company also maintains contingency liquidity plans that outline alternative actions and enable appropriate and timely responses under stress scenarios.

Washington Mutual, Inc.

Liquidity for Washington Mutual, Inc. ("the Parent Company") is generated through its ability to raise funds through dividends from subsidiaries and in various capital markets such as unsecured debt and commercial paper.

One of Washington Mutual, Inc.'s key funding sources is from dividends paid by its banking subsidiaries. The Parent Company received dividends from its subsidiaries during the first quarter of 2005 and expects to continue to receive dividends in the future. Banking subsidiaries dividends may be reduced from time to time to ensure that internal capital targets are met. Various regulatory requirements related to capital adequacy and retained earnings also limit the amount of dividends that can be paid by the Parent Company's banking subsidiaries. For more information on such dividend limitations, refer to the Company's 2004 Annual Report on Form 10-K, "Business – Regulation and Supervision" and Note 18 to the Consolidated Financial Statements – "Regulatory Capital Requirements and Dividend Restrictions."

During 2003, Washington Mutual, Inc. filed two shelf registration statements with the Securities and Exchange Commission, registering a total of $7 billion in debt securities, preferred stock and depositary shares in the United States and in international capital markets. At March 31, 2005, the Company had $2.65 billion available for issuance under these registration statements.

Washington Mutual, Inc. also has a commercial paper program and a revolving credit facility that are sources of liquidity. At March 31, 2005, the commercial paper program provided for up to $500 million in funds, but it was subsequently increased to a maximum of $1 billion. In addition, the Company's revolving credit facility of $800 million provides credit support for Washington Mutual, Inc.'s commercial paper program as well as funds for general corporate purposes. At March 31, 2005, Washington Mutual, Inc. had no commercial paper outstanding and the entire amount of the revolving credit facility was available.

The Parent Company's senior debt and commercial paper was rated A and F1 by Fitch, A3 and P2 by Moody's and A- and A2 by Standard and Poor's.

Washington Mutual, Inc. maintains sufficient liquidity to cover all debt obligations maturing over the next twelve months.

Banking Subsidiaries

The principal sources of liquidity for the Company's banking subsidiaries are customer deposits, wholesale borrowings, the maturity and repayment of portfolio loans, securities held in the available-for-sale portfolio and mortgage loans designated as held for sale. Among these sources, transaction deposits and wholesale borrowings from FHLB advances and repurchase agreements continue to provide the Company with a significant source of stable funding. During the first three months of 2005, those sources funded 67% of average total assets. The Company's continuing ability to retain its transaction deposit base and to attract new deposits depends on various factors, such as customer service satisfaction levels and the competitiveness of interest rates offered on deposit products. The Company continues to have the necessary assets available to pledge as collateral to obtain FHLB advances and repurchase agreements to offset any potential declines in deposit balances.

At March 31, 2005, the Company's proceeds from the sales of loans were approximately $35 billion. These proceeds were, in turn, used as the primary funding source for the origination and purchases, net of principal payments, of approximately $39 billion of loans held for sale during the same period. Typically, a cyclical pattern of sales and originations/purchases repeats itself during the course of a period and the amount of funding necessary to sustain mortgage banking operations does not significantly affect the Company's overall level of liquidity resources. At March 31, 2005, originations/ purchases of loans held for sale, net of principal payments, exceeded the proceeds from the sale of loans held for sale by approximately $4 billion.

The Company's banking subsidiaries also raise funds in domestic and international capital markets to supplement their primary funding sources. In August 2003, the Company established a Global Bank Note Program that allows Washington Mutual Bank ("WMB," f/k/a "Washington Mutual Bank, FA") to issue senior and subordinated notes in the United States and in international capital markets in a variety of currencies and structures. Under this program, WMB may issue up to $15 billion in notes, of which $5 billion can be issued as subordinated notes subject to regulatory approval. The maximum aggregate principal amount of notes with maturities greater than 270 days from the date of issue offered by WMB may not exceed $7.5 billion. At March 31, 2005, WMB had $12.50 billion available under this program, including $2.5 billion of subordinated notes.

Senior unsecured long-term obligations of WMB were rated A by Fitch, A2 by Moody's and A by Standard and Poor's. Short-term obligations were rated F1 by Fitch, P1 by Moody's and A1 by Standard and Poor's.

Non-banking Subsidiaries

Long Beach Mortgage has revolving credit facilities with non-affiliated lenders totaling $8.0 billion that are used to fund loans held for sale. At March 31, 2005, Long Beach Mortgage had borrowings outstanding of $6.5 billion under these credit facilities.

Off-Balance Sheet Activities

Asset Securitization

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

When the Company sells or securitizes loans, it generally retains the right to service the loans and may retain senior, subordinated, residual, and other interests, all of which are considered retained interests in the sold or securitized assets. Retained interests may provide credit enhancement to the investors and, absent the violation of representations and warranties, generally represent the Company's maximum risk exposure associated with these transactions. Retained interests in securitizations were $1.77 billion at March 31, 2005, of which $1.76 billion have either a AAA credit rating or are agency insured. Additional information concerning securitization transactions is included in Note 6 to the Consolidated Financial Statements – "Mortgage Banking Activities" in the Company's 2004 Annual Report on Form 10-K.

Guarantees

The Company may incur liabilities under certain contractual agreements contingent upon the occurrence of certain events. A discussion of these contractual arrangements under which the Company may be held liable is included in Note 5 to the Consolidated Financial Statements – "Guarantees."

Capital Adequacy

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

	March 31, 2005
	March 31, 2005				Well-Capitalized Minimum
	WMB		WMBfsb		Well-Capitalized Minimum
Tier 1 capital to adjusted total assets (leverage)	5.69	%	87.41	%	5.00	%
Adjusted tier 1 capital to total risk-weighted assets	8.40		376.04		6.00	%
Total risk-based capital to total risk-weighted assets	11.68		376.07		10.00	%

The Company's federal savings bank subsidiaries are also required by Office of Thrift Supervision regulations to maintain tangible capital of at least 1.50% of assets. WMB and WMBfsb satisfied this requirement at March 31, 2005.

The Company's broker-dealer subsidiaries are also subject to capital requirements. At March 31, 2005, all of its broker-dealer subsidiaries were in compliance with their applicable capital requirements.

On February 1, 2004, WMBfsb became a subsidiary of WMB. This reorganization was followed by the contribution of $23.27 billion of mortgage-backed and investment securities by WMB to WMBfsb on March 1, 2004. Due to the low risk weights assigned to these securities under the federal banking agency regulatory capital guidelines, their contribution to WMBfsb's capital base substantially increased that entity's risk-based capital ratios.

In 2003, the Company adopted a share repurchase program approved by the Board of Directors. Under the program, the Company is authorized to repurchase up to 100 million shares of its common stock, as conditions warrant. In the first quarter of 2005, the Company repurchased approximately 2.5 million shares of its common stock at an average price of $39.31. At March 31, 2005, the total remaining common stock repurchase authority under the 2003 program was approximately 40.9 million shares. Management may engage in future share repurchases as liquidity conditions permit and market conditions warrant.

Market Risk Management

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

The Company's trading securities are primarily comprised of financial instruments, such as principal-only mortgage-backed securities, used for MSR risk management activities. As such, the related interest rate risk of those financial instruments used for MSR risk management activities is considered within the sensitivity comparison, presented later within this section.

Interest rate risk is managed within a consolidated enterprise risk management framework that includes the measurement and management of specific portfolios (MSR and Other Mortgage Banking) discussed below. The principal objective of 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 the Board. The Board has delegated the oversight of the administration of this policy to the Finance Committee of the Board.

MSR Risk Management

The Company manages potential impairment in the fair value of MSR and increased amortization levels of MSR through a comprehensive risk management program. The intent is to offset the changes in MSR fair value and changes in MSR amortization above anticipated levels with changes in the fair value of risk management instruments. The risk management instruments include interest rate contracts, forward purchase commitments and available-for-sale and trading securities. The securities generally consist of fixed-rate debt securities, such as U.S. Government and agency obligations and mortgage-backed securities, including principal-only strips. The interest rate contracts typically consist of interest rate swaps, interest rate swaptions, interest rate floors and interest rate caps. The Company also enters into forward commitments to purchase mortgage-backed securities, which generally are agreements to purchase 15- and 30-year fixed-rate mortgage-backed securities.

The fair value of MSR is primarily affected by changes in prepayments that result from shifts in mortgage rates. Changes in the value of MSR risk management instruments due to changes in interest rates vary based on the specific instrument. For example, changes in the fair value of interest rate swaps are driven by shifts in interest rate swap rates and the fair value of U.S. Treasury securities is based on changes in U.S. Treasury rates. Mortgage rates may move more or less than the rates on Treasury bonds or interest rate swaps. This could result in a change in the fair value of the MSR that differs from the change in fair value of the MSR risk management instruments. This difference in market indices between the MSR and the risk management instruments results in what is referred to as basis risk.

During the third quarter of 2004, the Company adopted an MSR risk management approach that reduces its exposure to basis risk. As a result, the amount of mortgage based risk management products, such as forward commitments to purchase and sell mortgage-backed securities, was increased, while the

amount of LIBOR based products, such as interest rate swap contracts, decreased. Due to the inherent optionality in mortgage-based products, additional derivatives were also purchased to mitigate the optionality risk created by these products. This change in approach resulted in a significant increase in the total notional balance of derivative contracts that are designated as MSR risk management instruments.

The fair value of MSR decreases and the amortization rate increases in a declining interest rate environment due to the higher prepayment activity, resulting in the potential for loss of value and a reduction in net loan servicing income. During periods of rising interest rates, the amortization rate of MSR decreases and the fair value of MSR increases due to lower prepayment activity.

The Company manages the MSR daily and adjusts the mix of instruments used to manage MSR fair value changes as interest rates and market conditions warrant. The objective is to maintain an efficient and fairly liquid mix as well as a diverse portfolio of risk management instruments with maturity ranges that correspond well to the anticipated behavior of the MSR. For that portion of the MSR which qualifies for hedge accounting treatment, all changes in fair value of the MSR, even when the fair value is higher than amortized cost, will be recorded through earnings. MSR which do not qualify for hedge accounting treatment must be accounted for at the lower of cost or market value. The Company also manages the size of the MSR asset. Depending on market conditions and the desire to expand customer relationships, management may periodically sell or purchase additional servicing. Management may also structure loan sales to control the size of the MSR asset created by any particular transaction.

The Company believes this overall risk management strategy is the most efficient approach to managing MSR fair value risk. The success of this strategy, however, is dependent on management's decisions regarding the amount, type and mix of MSR risk management instruments that are selected to manage the changes in fair value of the mortgage servicing asset. If this strategy is not successful, net income could be adversely affected.

Other Mortgage Banking Risk Management

The Company also manages the risks associated with its home loan mortgage warehouse and pipeline. The mortgage warehouse consists of funded loans intended for sale in the secondary market. The pipeline consists of commitments to originate or purchase mortgages to be sold in the secondary market. The risk associated with the mortgage pipeline and warehouse is the potential for changes in interest rates between the time the customer locks in the rate on the loan and the time the loan is sold.

The Company measures the risk profile of the mortgage warehouse and pipeline daily. As needed, to manage the warehouse and pipeline risk, management executes forward sales commitments, interest rate contracts and mortgage option contracts. A forward sales commitment protects against a rising interest rate environment, since the sales price and delivery date are already established. A forward sales commitment is different, however, from an option contract in that the Company is obligated to deliver the loan to the third party on the agreed-upon future date. Management also estimates the fallout factor, which represents the percentage of loans that are not expected to be funded, when determining the appropriate amount of pipeline risk management instruments.

Asset/Liability Risk Management

The purpose of asset/liability risk management is to assess the aggregate risk profile of the Company. Asset/liability risk analysis combines the MSR and Other Mortgage Banking activities with substantially all of the other remaining interest rate risk positions inherent in the Company's operations.

To analyze net income sensitivity, management projects net income in a variety of interest rate scenarios, assuming both parallel and non-parallel shifts in the yield curve. These scenarios also capture the net interest income sensitivity due to changes in the slope of the yield curve and changes in the spread between Treasury and LIBOR rates. Additionally, management measures the sensitivity of asset and liability fair value changes to changes in interest rates to analyze risk exposure over longer periods of time.

The projection of the sensitivity of net income requires numerous assumptions. Prepayment speeds, decay rates (the estimated runoff of deposit accounts that do not have a stated maturity) and loan and deposit volume and mix projections are the most significant assumptions. Prepayments affect the size of the loan and mortgage-backed securities portfolios, which impacts net interest income, and is 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 various 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 analysis of customer behavior.

The slope of the yield curve, current interest rate conditions and the speed of changes in interest rates all affect sensitivity to changes in interest rates. Borrowings and, to a lesser extent, interest-bearing deposits typically reprice faster than the Company's adjustable-rate assets. An additional lag effect is inherent in adjustable-rate loans and mortgage-backed securities 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 those indexed to the 11th District FHLB monthly weighted average cost of funds index.

The sensitivity of new loan volume and mix to changes in market interest rate levels is also projected. Management generally assumes a reduction in total loan production in rising interest rate scenarios accompanied by a shift towards a greater proportion of adjustable-rate production. Conversely, the Company generally assumes an increase in total loan production in falling interest rate scenarios accompanied by a shift towards a greater proportion of fixed-rate loans. The gain from mortgage loans also varies under different interest rate scenarios. Normally, the gain from mortgage loans increases in falling interest rate environments primarily from high fixed-rate mortgage refinancing activity. Conversely, the gain from mortgage loans may decline when interest rates increase if management chooses to retain more loans in the portfolio.

In periods of rising interest rates, the net interest margin normally contracts since the repricing period of the Company's liabilities is shorter than the repricing period of its assets. The net interest margin generally expands in periods of falling interest rates as borrowing costs reprice downward faster than asset yields.

To manage interest rate sensitivity, management first utilizes the interest rate risk characteristics of the balance sheet assets and liabilities to offset each other as much as possible. Balance sheet products have a variety of risk profiles and sensitivities. Some of the components of interest rate risk are countercyclical. Management may adjust the amount or mix of risk management instruments based on the countercyclical behavior of the balance sheet products.

When the countercyclical behavior inherent in portions of the Company's balance sheet does not result in an acceptable risk profile, management utilizes investment securities and interest rate contracts to mitigate this situation. The interest rate contracts used for this purpose are classified as asset/liability risk management instruments. These contracts are often used to modify the repricing period of interest-bearing funding sources with the intention of reducing the volatility of net interest income. The types of contracts used for this purpose consist of interest rate swaps, interest rate corridors, interest rate swaptions and certain derivatives that are embedded in borrowings. Management also uses receive-fixed swaps as part of the asset/liability risk management strategy to help modify the repricing characteristics of certain long-term liabilities to match those of the assets. Typically, these are swaps of long-term fixed-rate debt to a short-term adjustable-rate, which more closely resembles asset repricing characteristics.

April 1, 2005 and January 1, 2005 Sensitivity Comparison

The table below indicates the sensitivity of net interest income and net income as a result of interest rate movements on market risk sensitive instruments. The base case used for this sensitivity analysis is similar to the Company's most recent earnings plan for the respective twelve month periods as of the date the analysis was performed. The comparative results assume parallel shifts in the yield curve with interest rates rising 200

basis points in even quarterly increments over the twelve month periods ending March 31, 2006 and December 31, 2005 and interest rates decreasing by 50 basis points in even quarterly increments over the first six months of the twelve month periods. The analysis also incorporates assumptions about balance sheet dynamics such as loan and deposit growth and pricing, changes in funding mix and asset and liability repricing and maturity characteristics. The projected interest rate sensitivities of net interest income and net income shown below may differ significantly from actual results, particularly with respect to non-parallel shifts in the yield curve or changes in the spreads between mortgage, Treasury and LIBOR rates.

		Gradual Change in Rates
		-50 basis points		+200 basis points
Net interest income change for the one-year period beginning:
	April 1, 2005	1.49	%	(2.14	)%
	January 1, 2005	2.61		(2.18	)
Net income change for the one-year period beginning:
	April 1, 2005	2.02		(3.08	)
	January 1, 2005	(0.95	)	(1.37	)

Net income sensitivity changed from the prior quarter as movements in the value of MSR-related risk management instruments mostly offset movements in the value of the MSR asset and a significant portion of MSR amortization expense in both scenarios. In the January 1, 2005 simulation the MSR-related risk management instruments offset most of the change in the value of the MSR asset but offset changes in amortization expense to a lesser extent, which resulted in lower net income sensitivity in the - -50 basis point scenario and a corresponding decrease in the rising interest rate scenario.

Net interest income sensitivity in the current quarter approximated the sensitivity projected in the prior quarter in the +200 basis point scenario and declined slightly in the - -50 basis point scenario. The net duration of earning assets and costing liabilities was not substantially different than at year-end. However, the decline in the - -50 basis point scenario was mainly due to projected changes in the composition of the loans-held-for-sale portfolio in this environment. In the current period simulation, adjustable-rate loans were projected to comprise a higher proportion of the loans-held-for-sale portfolio than the January 1 simulation, reducing the increase in net interest income in the falling interest rate scenario.

These sensitivity analyses are limited in that they were performed at a particular point in time, are subject to the accuracy of various assumptions used, including prepayment forecasts and discount rates, and do not incorporate other factors that would impact the Company's overall financial performance in such scenarios, most significantly the impact of changes in gain from mortgage loans that result from changes in interest rates. In addition, not all of the changes in fair value may impact current period earnings. For example, the portion of the MSR that does not qualify for fair value hedge accounting treatment may increase in value, but the amount of the increase that is recorded in current period earnings may be limited to the recovery of the impairment reserve within each stratum. These analyses also assume that the MSR risk management strategy is constant and that mortgage and interest rate swap spreads are constant in all interest rate environments. These assumptions may not be realized. For example, changes in spreads between interest rate indices could result in significant changes in projected net income sensitivity. Projected net income may increase if market rates on interest rate swaps decrease by more than the decrease in mortgage rates, while the projected net income may decline if the rates on swaps increase by more than mortgage rates. For all of these reasons, the preceding sensitivity estimates should not be viewed as an earnings forecast.

Maturity and Repricing Information

The Company uses interest rate risk management contracts and available-for-sale and trading securities as tools to manage its interest rate risk profile. The following tables summarize the key contractual terms associated with these contracts and securities. Substantially all of the interest rate risk management swaps, swaptions and caps at March 31, 2005 are indexed to three-month LIBOR.

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

					March 31, 2005
					Maturity Range
					Net Fair Value			Total Notional Amount			2005			2006			2007			2008			2009			After 2009
					(dollars in millions)
Interest Rate Risk Management Contracts:
	Asset/Liability Risk Management
		Pay-fixed swaps:			$	6
			Contractual maturity					$	24,733		$	10,000		$	11,933		$	2,800			–			–			–
			Weighted average pay rate						3.52	%		2.90	%		3.69	%		5.01	%		–			–			–
			Weighted average receive rate						2.81	%		2.73	%		2.89	%		2.79	%		–			–			–
		Receive-fixed swaps:				(123	)
			Contractual maturity					$	24,775		$	80		$	1,000		$	10,975		$	4,850		$	1,175		$	6,695
			Weighted average pay rate						2.91	%		1.04	%		2.79	%		2.90	%		2.72	%		3.31	%		3.05	%
			Weighted average receive rate						4.33	%		5.41	%		6.81	%		3.53	%		4.10	%		4.25	%		5.44	%
		Basis swaps:				7
			Contractual maturity					$	5,000			–		$	3,500		$	500		$	1,000			–			–
			Weighted average pay rate						2.68	%		–			2.68	%		2.64	%		2.72	%		–			–
			Weighted average receive rate						2.71	%		–			2.69	%		2.69	%		2.81	%		–			–
		Interest rate caps:				24
			Contractual maturity					$	16,375			–		$	12,875		$	1,250		$	2,250			–			–
			Weighted average strike rate						4.98	%		–			4.73	%		5.65	%		6.04	%		–			–
		Payor swaptions:				11
			Contractual maturity (option)					$	4,000			–		$	4,000			–			–			–			–
			Weighted average strike rate						5.50	%		–			5.50	%		–			–			–			–
			Contractual maturity (swap)						–			–			–			–		$	4,000			–			–
			Weighted average pay rate						–			–			–			–			5.50	%		–			–
		Receiver swaptions:				9
			Contractual maturity (option)					$	2,795		$	250		$	2,545			–			–			–			–
			Weighted average strike rate						3.72	%		3.75	%		3.72	%		–			–			–			–
			Contractual maturity (swap)						–			–			–			–			–		$	450		$	2,345
			Weighted average receive rate						–			–			–			–			–			3.52	%		3.76	%

				Total asset/liability risk management	$	(66	)	$	77,678

(This table is continued on the next page.)

(Continued from the previous page.)

				March 31, 2005
				Maturity Range
				Net Fair Value			Total Notional Amount			2005			2006			2007			2008			2009			After 2009
				(dollars in millions)
Interest Rate Risk Management Contracts:
	Other Mortgage Banking Risk Management
		Forward purchase commitments:		$	(73	)
			Contractual maturity				$	20,118		$	20,118			–			–			–			–			–
			Weighted average price					99.42			99.42			–			–			–			–			–
		Forward sales commitments:			178
			Contractual maturity				$	45,145		$	45,145			–			–			–			–			–
			Weighted average price					99.57			99.57			–			–			–			–			–
		Interest rate futures:			–
			Contractual maturity				$	20,712		$	5,623		$	7,209		$	4,970		$	1,886		$	929		$	95
			Weighted average price					95.51			96.09			95.48			95.25			95.10			94.92			94.83
		Interest rate corridors:			4
			Contractual maturity				$	2,843			–			–			–		$	2,445			–		$	398
			Weighted average strike rate – long cap					4.28	%		–			–			–			4.15	%		–			5.05	%
			Weighted average strike rate – short cap					9.69	%		–			–			–			9.88	%		–			8.55	%
		Mortgage put options:			30
			Contractual maturity				$	256		$	256			–			–			–			–			–
			Weighted average strike price					100.24			100.24			–			–			–			–			–
		Mortgage call options:			2
			Contractual maturity				$	56		$	56			–			–			–			–			–
			Weighted average strike price					101.10			101.10			–			–			–			–			–
		Pay-fixed swaps:			87
			Contractual maturity				$	12,795		$	2,460		$	4,635		$	3,610		$	870		$	210		$	1,010
			Weighted average pay rate					3.57	%		2.60	%		3.43	%		3.97	%		4.15	%		3.88	%		4.56	%
			Weighted average receive rate					2.95	%		2.88	%		3.00	%		2.93	%		2.98	%		2.81	%		2.87	%
		Receive-fixed swaps:			(13	)
			Contractual maturity				$	2,535			–		$	300		$	1,200		$	500			–		$	535
			Weighted average pay rate					2.88	%		–			2.61	%		2.92	%		2.96	%		–			2.87	%
			Weighted average receive rate					3.96	%		–			2.19	%		3.87	%		4.13	%		–			4.97	%
		Payor swaptions:			15
			Contractual maturity (option)				$	3,495		$	2,820		$	675			–			–			–			–
			Weighted average strike rate					5.65	%		5.76	%		5.21	%		–			–			–			–
			Contractual maturity (swap)					–			–			–		$	1,000		$	200		$	400		$	1,895
			Weighted average pay rate					–			–			–			5.13	%		4.58	%		5.18	%		6.15	%
		Receiver swaptions:			1
			Contractual maturity (option)				$	700		$	600		$	100			–			–			–			–
			Weighted average strike rate					3.73	%		3.64	%		4.28	%		–			–			–			–
			Contractual maturity (swap)					–			–			–		$	300			–			–		$	400
			Weighted average receive rate					–			–			–			3.64	%		–			–			3.80	%

			Total other mortgage banking risk management	$	231		$	108,655

(This table is continued on the next page.)

(Continued from the previous page.)

						March 31, 2005
						Maturity Range
						Net Fair Value			Total Notional Amount			2005			2006			2007			2008			2009			After 2009
						(dollars in millions)
Interest Rate Risk Management Contracts:
	MSR Risk Management
		Pay-fixed swaps:				$	12
			Contractual maturity						$	3,500		$	3,000		$	500			–			–			–			–
			Weighted average pay rate							2.70	%		2.37	%		4.66	%		–			–			–			–
			Weighted average receive rate							3.03	%		3.03	%		3.06	%		–			–			–			–
		Receive-fixed swaps:					(115	)
			Contractual maturity						$	20,561			–			–		$	4,600		$	4,155		$	75		$	11,731
			Weighted average pay rate							2.95	%		–			–			2.93	%		2.99	%		2.66	%		2.95	%
			Weighted average receive rate							4.46	%		–			–			3.95	%		4.25	%		3.38	%		4.74	%
		Constant maturity mortgage swaps:					1
			Contractual maturity						$	100			–			–			–		$	100			–			–
			Weighted average pay rate							541	%		–			–			–			5.41	%		–			–
			Weighted average receive rate							5.61	%		–			–			–			5.61	%		–			–
		Payor swaptions:					208
			Contractual maturity (option)						$	56,525		$	34,925		$	21,600			–			–			–			–
			Weighted average strike rate							5.55	%		5.57	%		5.52	%		–			–			–			–
			Contractual maturity (swap)							–			–			–		$	4,000		$	13,300		$	3,000		$	36,225
			Weighted average pay rate							–			–			–			5.15	%		5.18	%		5.40	%		5.75	%
		Written payor swaptions:					(66	)
			Contractual maturity (option)						$	4,625		$	1,700			–		$	300		$	2,625			–			–
			Weighted average strike rate							4.99	%		4.69	%		–			5.26	%		5.16	%		–			–
			Contractual maturity (swap)							–			–			–		$	750		$	450			–		$	3,425
			Weighted average strike rate							–			–			–			4.40	%		4.73	%		–			5.16	%
		Written receiver swaptions:					(36	)
			Contractual maturity (option)						$	7,775		$	4,850			–		$	300		$	2,625			–			–
			Weighted average strike rate							3.98	%		3.75	%		–			4.26	%		4.38	%		–			–
			Contractual maturity (swap)							–			–			–		$	750		$	600			–		$	6,425
			Weighted average strike rate							–			–			–			3.40	%		3.73	%		–			4.07	%
		Interest rate caps:					33
			Contractual maturity						$	2,250			–			–			–		$	1,000			–		$	1,250
			Weighted average strike rate							5.09	%		–			–			–			4.76	%		–			5.35	%
		Interest rate futures:					–
			Contractual maturity						$	30		$	30			–			–			–			–			–
			Weighted average price							96.49			96.49			–			–			–			–			–
		Forward purchase commitments:					(247	)
			Contractual maturity						$	37,587		$	37,587			–			–			–			–			–
			Weighted average price							99.31			99.31			–			–			–			–			–
		Forward sales commitments:					(21	)
			Contractual maturity						$	7,305		$	7,305			–			–			–			–			–
			Weighted average price							98.88			98.88			–			–			–			–			–

				Total MSR risk management		$	(231	)	$	140,258

					Total interest rate risk management contracts	$	(66	)	$	326,591

				March 31, 2005
				Amortized Cost		Net Unrealized Gain	Fair Value
				(in millions)
MSR Risk Management:
	Available-For-Sale Securities:
		Mortgage-backed securities – U.S. Government and agency⁽¹⁾		$	176	$9	$	185
	Trading Securities:
		Mortgage-backed securities – U.S. Government and agency			n/a	n/a		4,004

			Total MSR risk management securities				$	4,189

⁽¹⁾: Mortgage-backed securities mature after 2009.

					December 31, 2004
					Maturity Range
					Net Fair Value			Total Notional Amount			2005			2006			2007			2008			2009			After 2009
					(dollars in millions)
Interest Rate Risk Management Contracts:
	Asset/Liability Risk Management
		Pay-fixed swaps:			$	(112	)
			Contractual maturity					$	16,013		$	11,780		$	1,433		$	2,800			–			–			–
			Weighted average pay rate						3.51	%		3.08	%		4.18	%		5.01	%		–			–			–
			Weighted average receive rate						2.34	%		2.39	%		2.13	%		2.24	%		–			–			–
		Receive-fixed swaps:				218
			Contractual maturity					$	19,930		$	80		$	1,000		$	10,950		$	850		$	1,150		$	5,900
			Weighted average pay rate						2.53	%		0.62	%		2.29	%		2.53	%		2.46	%		2.74	%		2.55	%
			Weighted average receive rate						4.35	%		5.41	%		6.81	%		3.53	%		3.99	%		4.25	%		5.51	%
		Interest rate caps:				21
			Contractual maturity					$	26,075		$	3,000		$	19,875		$	3,200			–			–			–
			Weighted average strike rate						4.38	%		3.30	%		4.46	%		4.91	%		–			–			–
		Interest rate corridors:				2
			Contractual maturity					$	2,585		$	7			–			–			–			–		$	2,578
			Weighted average strike rate – long cap						9.80	%		5.94	%		–			–			–			–			9.81	%
			Weighted average strike rate – short cap						10.09	%		7.44	%		–			–			–			–			10.10	%
		Payor swaptions:				1
			Contractual maturity (option)					$	500			–		$	500			–			–			–			–
			Weighted average strike rate						5.30	%		–			5.30	%		–			–			–			–
			Contractual maturity (swap)						–			–			–		$	500			–			–			–
			Weighted average pay rate						–			–			–			5.30	%		–			–			–
		Receiver swaptions:				6
			Contractual maturity (option)					$	1,070		$	750		$	320			–			–			–			–
			Weighted average strike rate						3.87	%		3.92	%		3.75	%		–			–			–			–
			Contractual maturity (swap)						–			–			–			–			–			–		$	1,070
			Weighted average receive rate						–			–			–			–			–			–			3.87	%

				Total asset/liability risk management	$	136		$	66,173

(This table is continued on the next page.)

(Continued from the previous page.)

					December 31, 2004
					Maturity Range
					Net Fair Value			Total Notional Amount			2005			2006			2007			2008			2009			After 2009
					(dollars in millions)
Interest Rate Risk Management Contracts:
	Other Mortgage Banking Risk Management
		Forward purchase commitments:			$	28
			Contractual maturity					$	11,625		$	11,625			–			–			–			–			–
			Weighted average price						101.15			101.15			–			–			–			–			–
		Forward sales commitments:				(48	)
			Contractual maturity					$	31,488		$	31,488			–			–			–			–			–
			Weighted average price						101.02			101.02			–			–			–			–			–
		Interest rate futures:				–
			Contractual maturity					$	18,530		$	7,446		$	5,914		$	4,267		$	628		$	275			–
			Weighted average price						96.30			96.75			96.19			95.83			95.48			95.13			–
		Interest rate corridors:				1
			Contractual maturity					$	3,439			–			–			–		$	3,439			–			–
			Weighted average strike rate – long cap						3.94	%		–			–			–			3.94	%		–			–
			Weighted average strike rate – short cap						10.00	%		–			–			–			10.00	%		–			–
		Mortgage put options:				4
			Contractual maturity					$	1,215		$	1,215			–			–			–			–			–
			Weighted average strike price						101.35			101.35			–			–			–			–			–
		Pay-fixed swaps:				22
			Contractual maturity					$	9,371		$	4,840		$	3,280		$	380			–		$	233		$	638
			Weighted average pay rate						3.08	%		2.79	%		3.10	%		3.33	%		–			3.91	%		4.68	%
			Weighted average receive rate						2.37	%		2.40	%		2.34	%		2.30	%		–			2.27	%		2.38	%
		Receive-fixed swaps:				10
			Contractual maturity					$	1,335			–		$	300		$	400			–			–		$	635
			Weighted average pay rate						2.20	%		–			2.05	%		2.13	%		–			–			2.32	%
			Weighted average receive rate						3.84	%		–			2.19	%		3.37	%		–			–			4.91	%
		Payor swaptions:				1
			Contractual maturity (option)					$	6,040		$	6,040			–			–			–			–			–
			Weighted average strike rate						6.39	%		6.39	%		–			–			–			–			–
			Contractual maturity (swap)						–			–			–			–			–			–		$	6,040
			Weighted average pay rate						–			–			–			–			–			–			6.39	%

				Total other mortgage banking risk management	$	18		$	83,043

(This table is continued on the next page.)

(Continued from the previous page.)

						December 31, 2004
						Maturity Range
						Net Fair Value			Total Notional Amount			2005			2006			2007			2008			2009			After 2009
						(dollars in millions)
Interest Rate Risk Management Contracts:
	MSR Risk Management
		Pay-fixed swaps:				$	24
			Contractual maturity						$	4,500		$	3,000		$	1,500			–			–			–			–
			Weighted average pay rate							2.53	%		2.37	%		2.83	%		–			–			–			–
			Weighted average receive rate							2.50	%		2.50	%		2.49	%		–			–			–			–
		Receive-fixed swaps:					181
			Contractual maturity						$	10,310			–		$	600			–		$	255		$	575		$	8,880
			Weighted average pay rate							2.31	%		–			2.51	%		–			2.04	%		2.31	%		2.30	%
			Weighted average receive rate							4.74	%		–			3.36	%		–			3.55	%		3.74	%		4.93	%
		Constant maturity mortgage swaps:					1
			Contractual maturity						$	100			–			–			–		$	100			–			–
			Weighted average pay rate							5.11	%		–			–			–			5.11	%		–			–
			Weighted average receive rate							5.22	%		–			–			–			5.22	%		–			–
		Payor swaptions:					83
			Contractual maturity (option)						$	52,200		$	49,150		$	3,050			–			–			–			–
			Weighted average strike rate							5.54	%		5.56	%		5.22	%		–			–			–			–
			Contractual maturity (swap)							–			–			–		$	4,950		$	3,800			–		$	43,450
			Weighted average pay rate							–			–			–			4.21	%		4.87	%		–			5.75	%
		Written receiver swaptions:					(3	)
			Contractual maturity (option)						$	7,000		$	7,000			–			–			–			–			–
			Weighted average strike rate							3.44	%		3.44	%		–			–			–			–			–
			Contractual maturity (swap)							–			–			–		$	1,000			–			–		$	6,000
			Weighted average strike rate							–			–			–			2.77	%		–			–			3.56	%
		Forward purchase commitments:					128
			Contractual maturity						$	41,912		$	41,912			–			–			–			–			–
			Weighted average price							99.83			99.83			–			–			–			–			–
		Forward sales commitments:					(9	)
			Contractual maturity						$	5,655		$	5,655			–			–			–			–			–
			Weighted average price							99.31			99.31			–			–			–			–			–

				Total MSR risk management		$	405		$	121,677

					Total interest rate risk management contracts	$	559		$	270,893

				December 31, 2004
				Amortized Cost		Net Unrealized Gain	Fair Value
				(in millions)
MSR Risk Management:
	Available-For-Sale Securities:
		Mortgage-backed securities – U.S. Government and agency⁽¹⁾		$	2,137	$19	$	2,156
	Trading Securities:
		Mortgage-backed securities – U.S. Government and agency			n/a	n/a		3,512

			Total MSR risk management securities				$	5,668

⁽¹⁾: Mortgage-backed securities mature after 2009.

Derivative Counterparty Credit Risk

Derivative financial instruments expose the Company to credit risk in the event of nonperformance by counterparties to such agreements. This risk consists primarily of the termination value of agreements where the Company is in a favorable position. Credit risk related to derivative financial instruments is considered and provided for separately from the allowance for loan and lease losses. The Company manages the credit risk associated with its various derivative agreements through counterparty credit review, counterparty exposure limits and monitoring procedures. The Company obtains collateral from certain counterparties for amounts in excess of exposure limits and monitors all exposure and collateral requirements daily. The fair value of collateral received from a counterparty is continually monitored and the Company may request additional collateral from counterparties or return collateral pledged as deemed appropriate. The Company's agreements generally include master netting agreements whereby the counterparties are entitled to settle their positions "net." At March 31, 2005 and December 31, 2004, the gross positive fair value of the Company's derivative financial instruments was $1.07 billion and $899 million. The Company's master netting agreements at March 31, 2005 and December 31, 2004 reduced the Company's derivative counterparty credit risk by $632 million and $266 million. The Company's collateral against derivative financial instruments was $122 million and $280 million at March 31, 2005 and December 31, 2004. Accordingly, the Company's credit risk related to derivative financial instruments at March 31, 2005 and December 31, 2004 was $315 million and $353 million.

Operational Risk Management

Operational risk is the risk of loss resulting from human fallibility, inadequate or failed internal processes and systems, or from external events, including loss related to legal, reputation, public policy and strategic risks. Operational risk can occur in any activity, function, or unit of the Company.

Primary responsibility for managing operational risk rests with the lines of business. Each line of business is responsible for identifying its operational risks and establishing and maintaining appropriate business-specific policies, internal control procedures and monitoring tools for these risks. To help identify, assess and manage corporate-wide risks, the Company uses corporate support groups such as Legal, Compliance, Information Security, Continuity Assurance, Strategic Sourcing, and Finance. These groups assist the lines of business in the development and implementation of risk management practices specific to the needs of each business.

As the management of operational risk continues to evolve into a distinct risk discipline, the Company's independent operational risk oversight function is working with the lines of business and corporate support functions to refine the existing corporate operational risk governance structure and framework. The objective of this effort is to achieve an integrated approach that emphasizes proactive management of operational risk using measures, tools and techniques that are risk-focused and consistently applied company-wide. This will further enhance management's ability to aggregate and analyze operational risk data across business lines, processes and products, and improve communication of these risks to management and the Audit Committee of the Board of Directors.

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of business, the Company and its subsidiaries are routinely defendants in or parties to a number of pending and threatened legal actions and proceedings, including actions brought on behalf of various classes of claimants. In certain of these actions and proceedings, claims for substantial monetary damages are asserted against the Company and its subsidiaries. Certain of these actions and proceedings are based on alleged violations of consumer protection, banking and other laws.

During 2004, six plaintiffs filed lawsuits in the U.S. District Court, Western Division of Washington, alleging violations of Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act"), Rule 10b-5 thereunder and Section 20(a) of the Exchange Act. Each plaintiff purported to represent a class of purchasers of Washington Mutual, Inc., securities from April 15, 2003 through June 28, 2004, and the defendants included the Company and various of its senior executives. Subsequently, a stipulated Order was submitted to the court through which the six cases were consolidated into a single action, lead plaintiffs and lead plaintiffs' counsel were appointed, and a schedule was set for further filings.

Pursuant to that schedule, lead plaintiffs filed their Consolidated Amended Complaint on March 1, 2005. In brief, the amended complaint alleges that in various public statements the defendants purportedly made misrepresentations and failed to disclose material facts concerning, among other things, alleged internal systems problems and hedging issues. The complaint also asserts that these and related problems were such that the Company's financial statements were not in compliance with generally accepted accounting principles ("GAAP") and Securities and Exchange Commission ("SEC") regulations.

The Company anticipates that the defendants will seek to dismiss the case. The defendants' motion to dismiss is to be filed by May 17, 2005, and briefing is to be completed by August 16, 2005. No oral argument has been set on defendants' anticipated motion.

Refer to Note 14 to the Consolidated Financial Statements – "Commitments, Guarantees and Contingencies" in the Company's 2004 Annual Report on Form 10-K for a further discussion of pending and threatened litigation action and proceedings against the Company.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The table below represents share repurchases made by the Company for the quarter ended March 31, 2005. Management may engage in future share repurchases as liquidity conditions permit and market conditions warrant.

Issuer Purchases of Equity Securities	(a) Total Number of Shares (or Units) Purchased⁽¹⁾	(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs⁽²⁾	(d) Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs
January 3, 2005 to January 31, 2005	37,097	$	40.84	–	43,465,506
February 1, 2005 to February 28, 2005	10,496		41.27	–	43,465,506
March 1, 2005 to March 31, 2005	2,540,000		39.31	2,540,000	40,925,506

Total	2,587,593		39.34	2,540,000	40,925,506

⁽¹⁾: In addition to shares repurchased pursuant to the Company's publicly announced repurchase program, this column includes shares acquired under equity compensation arrangements with the Company's employees and directors.
⁽²⁾: Effective July 15, 2003, the Company adopted a share repurchase program approved by the Board of Directors. Under the program, the Company is authorized to repurchase up to 100 million shares of its common stock, as conditions warrant. As of December 31, 2004, the Company had repurchased 56,534,494 shares.

For a discussion regarding working capital requirements and dividend restrictions applicable to the Company's banking subsidiaries, refer to the Company's 2004 Annual Report on Form 10-K, "Business – Regulation and Supervision" and Note 18 to the Consolidated Financial Statements – "Regulatory Capital Requirements and Dividend Restrictions."

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

None.

Item 6. Exhibits

(a): Exhibits

See Index of Exhibits on page 58.

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 May 9, 2005.

		WASHINGTON MUTUAL, INC.
		By:		/s/ THOMAS W. CASEY Thomas W. Casey Executive Vice President and Chief Financial Officer
		By:		/s/ ROBERT H. MILES Robert H. Miles Senior Vice President and Controller (Principal Accounting Officer)

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. 001-14667).
3.2		Articles of Amendment to the Amended and Restated Articles of Incorporation of the Company creating a class of preferred stock, Series RP. (Incorporated by reference to the Company's Annual Report on Form 10-K for the year ended December 31, 2000. File No. 001-14667).
3.3		Restated Bylaws of the Company as amended. (Incorporated by reference to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2003. File No. 001-14667).
4.1		Rights Agreement dated December 20, 2000 between Washington Mutual, Inc. and Mellon Investor Services, LLC. (Incorporated by reference to the Company's Current Report on Form 8-K filed January 8, 2001. File No. 001-14667).
4.2		The Company will furnish upon request copies of all instruments defining the rights of holders of long-term debt instruments of the Company and its consolidated subsidiaries.
4.3		Warrant Agreement dated as of April 30, 2001. (Incorporated by reference to the Company's Registration Statement on Form S-3. File No. 333-63976-01).
4.4		2003 Amended and Restated Warrant Agreement, dated March 11, 2003 by and between Washington Mutual, Inc. and Mellon Investor Services LLC. (Incorporated by reference to the Company's Current Report on Form 8-K, dated March 12, 2003. File No. 001-14667).
10.1		Restricted Stock Award Agreement dated January 10, 2005 between the Company and Stephen J. Rotella. (Incorporated by reference to the Form 8-K filed January 14, 2005. File No. 001-14667).
10.2		2005 Leadership Bonus Plan. (omitting confidential quantitative and qualitative performance factors) (filed herewith).
10.3		2005 Bonus Plan Performance Criteria and Target Bonus Amounts. (Incorporated by reference to Form 8-K filed January 24, 2005. File No. 001-14667).
10.4		Form of Restricted Stock Award Agreement pursuant to the 2003 Equity Incentive Plan. (Incorporated by reference to Form 8-K filed January 24, 2005. File No. 001-14667).
10.5		2005 Compensation Schedule for Non-Employee Directors of the Company. (Incorporated by reference to the Company's Current Report on Form 8-K/A filed February 18, 2005. File No. 001-14667).
31.1		Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).

Exhibit No.

31.2		Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1		Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
32.2		Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).
99.1		Computation of Ratios of Earnings to Fixed Charges (filed herewith).

QuickLinks

TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION
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 CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued) (UNAUDITED)
WASHINGTON MUTUAL, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PART II – OTHER INFORMATION
SIGNATURES
WASHINGTON MUTUAL, INC. INDEX OF EXHIBITS