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Washington Mutual Adjusts Earnings Outlook for 2004; Rising Interest Rates Impact Mortgage Banking; Growth in Retail Banking & Financial Services Continues

SEATTLE--(BUSINESS WIRE)--June 28, 2004--Washington Mutual, Inc. (NYSE:WM) today announced that expectations for a sustained increase in long-term interest rates will significantly impact the company's Mortgage Banking business resulting in 2004 earnings below previous guidance. Higher interest rates have lowered the company's mortgage production expectations at a time when cost reduction plans have not yet fully taken effect. The rise in interest rates is not expected to have a material effect on the 2004 performance of the company's Retail Banking & Financial Services and Commercial Group businesses.

"It now appears to us that the shift in the interest rate environment in recent months, with a sharp increase in long-term rates and a related reduction in mortgage volumes, will continue through the rest of the year. The effects of these changes are likely to outpace the timing of ongoing cost reduction plans in our Mortgage Banking business," said Kerry Killinger, Chairman, President and Chief Executive Officer.

"We're disappointed in this change in our 2004 outlook and we will not be satisfied until we have completed the resizing of our expense base and improved the efficiency and performance of our Mortgage Banking business," continued Killinger. "At the same time, we will remain focused on executing our core middle-market retail strategy."

Earnings for the full year are now estimated to range from $3.00 to $3.60 per diluted share.

The following table provides additional detail on the company's expectations regarding 2004 earnings composition, based upon the company's operating segment reporting. The 2004 estimate range is based on the assumption that the Fed Funds rate will increase gradually by between 75 and 125 basis points during the second half of the year and that the 10-year treasury yield will end the year between 4.5 percent and 5.0 percent:

                Earnings Per Diluted Share
--------------- -------------------------- ----------- ---------------
                2003 Actual                1Q04 Actual 2004 Estimate
--------------- -------------------------- ----------- ---------------
 Banking        $1.44                      $0.25       $(0.15)-$0.35
--------------- -------------------------- ----------- ---------------
Rest of
 Mutual         $2.77                      $0.93       $3.15-$3.25
--------------- -------------------------- ----------- ---------------
Total           $4.21                      $1.18(1)    $3.00-$3.60(1)
--------------- -------------------------- ----------- ---------------

    (1) Includes $0.45 per diluted share of income from discontinued
        operations related to Washington Mutual Finance Corporation, a
        former subsidiary which was sold at a gain in the first
        quarter of 2004, and the impact of restructuring and
        technology-related charges and a charge associated with the
        early retirement of certain high-cost Federal Home Loan Bank
        borrowings, which collectively reduced net income by
        approximately $0.11 per diluted share. In addition, there was
        a reduction of $0.08 per diluted share as a result of the
        one-time effect of the company's change in accounting for gain
        from mortgage loans.

The company's second quarter results will be reported on Wednesday, July 21 after market close. The company will discuss the second quarter results and guidance for 2004 in more detail during its investor call on Thursday, July 22 at 10:30 a.m. E.D.T.

Washington Mutual cited the following key factors concerning its outlook for 2004:

    --  The company expects its mortgage loan volumes and gain on sale
        margins to be below expectations and this together with the
        increasing portion of production originated for the company's
        loan portfolio, will significantly lower gains in its Mortgage
        Banking business, particularly during the second half of the
        year. Over time, this intentional mix shift to portfolio
        lending will benefit the company in the form of increased net
        interest income.

    --  Last year, the company set in motion a program to bring the
        Mortgage Banking business's cost structure in line with
        production volumes as part of its companywide 18-month expense
        reduction plan. However, reductions in expected Mortgage
        Banking revenues for the year are outpacing the previously
        planned cost takeouts in that business. The company expects to
        be able to reduce its expenses in line with declining revenue,
        largely through facility closures and headcount reductions,
        when key systems conversions are completed. System conversions
        are being implemented as promptly as practicable and are
        expected to be substantially completed in the third and fourth
        quarters of this year. Completing these system conversions
        will position the company to implement process improvements
        and other efficiency initiatives that will further drive down

    --  The company's Mortgage Banking results for the year will be
        reduced by the higher cost of hedging mortgage servicing
        rights in the changed interest rate environment.

    --  As would be expected in an increased interest rate
        environment, the company's mortgage servicing right asset has
        increased in value and has been offset by losses in
        corresponding hedges. However, in the second quarter,
        significantly tightening basis spreads (the difference between
        the mortgage and interest rate swap indicies) are expected to
        cause the loss in hedge value to exceed the increase in
        mortgage servicing rights value, thus reducing Mortgage
        Banking income. The company's loan pipeline hedging has not
        been adversely affected by these factors.

        "Our risk management approach does not attempt to fully hedge
        the effects of changes in basis spreads," said Tom Casey,
        Executive Vice President and Chief Financial Officer. "While
        basis spreads vary over time around a historical mean, a
        significant widening or tightening of basis spreads in any one
        quarter can affect net income. Our hedging results benefit
        when spreads are wider, as they were in the fourth quarter of
        2003 and the first quarter of 2004, and will be negatively
        affected as spreads tighten, as they have in the second
        quarter of this year."

    --  Finally, the company expects reduced net interest income
        primarily in the Mortgage Banking business, as the company's
        loans held for sale declined. The company noted that it sold
        approximately $14 billion in fixed-rate investment securities
        during the first quarter. This risk management strategy will
        reduce balance sheet exposure to rising interest rates over
        time; however it will also reduce anticipated growth in net
        interest income for 2004.

"While our Mortgage Banking business is clearly feeling the negative effects of its relatively high cost structure and the transition to a higher rate, portfolio lending environment, the rest of our businesses continue to perform well," Killinger said. "As we indicated when we first discussed our outlook for 2004, we expect double-digit year-to-year growth in our Retail Banking & Financial Services business. Our Retail Banking & Financial Services and Commercial Group businesses, which contributed the majority of the company's 2003 and first quarter 2004 net income, are not as sensitive to long-term interest rate changes as the more cyclical Mortgage Banking business and we expect these businesses to be the key drivers of our growth over the next few years. We are on track with our plans to open 250 new retail banking stores this year, and to add home equity and Option ARM loans to our balance sheet and grow fee income. In our Commercial Group, we continue to expand our multi-family business and wholesale non-prime mortgage business, Long Beach Mortgage."

Killinger added: "We remain focused on the critical tasks of rationalizing expenses in the Mortgage Banking business, reducing our overall operating costs and improving efficiency. We believe these cost savings and loan growth will restore positive momentum to our earnings as we move into next year. While cyclical factors are likely to hurt the company's near-term earnings outlook, we remain confident in the ability of our business to deliver on our long-held 13 percent earnings per share growth goal over time. We believe that our capital generating capability will enable us to continue balance sheet growth, maintain our dividend policy and repurchase our shares opportunistically."

About Washington Mutual

With a history dating back to 1889, Washington Mutual is a retailer of financial services that provides a diversified line of products and services to consumers and commercial clients. At March 31, 2004, Washington Mutual and its subsidiaries had assets of $280.77 billion. Washington Mutual currently operates more than 2,400 retail banking, mortgage lending, commercial banking and financial services offices throughout the nation. Washington Mutual's press releases are available at

Forward Looking Statement

Our Form 10-K/A and other documents that we file with the Securities and Exchange Commission contain forward-looking statements. In addition, our senior management may make forward-looking statements orally to analysts, investors, the media and others. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," or words of similar meaning, or future or conditional verbs such as "will," "would," "should," "could" or "may." Forward-looking statements provide our expectations or predictions of future conditions, events or results. They are not guarantees of future performance. By their nature, forward-looking statements are subject to risks and uncertainties. These statements speak only as of the date they are made. We do not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after the date the forward looking statements were made. There are a number of factors, many of which are beyond our control that could cause actual conditions, events or results to differ significantly from those described in the forward-looking statements.

    Some of these factors are:

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

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

    --  If we are unable to fully realize the operational and systems
        efficiencies sought to be achieved from our recently announced
        business segment realignment, our earnings could be adversely

    --  We face competition for loans and deposits from banking and
        nonbanking companies and national mortgage companies; and

    --  Changes in the regulation of financial services companies and
        housing government-sponsored enterprises could adversely
        affect our business.

    CONTACT: Washington Mutual
             Media Contact:
             Alan Gulick, 206-377-3637
             Investor Relations Contact:
             Doug Wisdorf, 206-461-3805
             Ruthanne King, 206-461-6421

    SOURCE: Washington Mutual