Exhibit
99.3
Washington
Mutual, Inc.
Prepared
Remarks for Fourth Quarter 2007 Earnings Conference Call
January
17, 2008
Please
see the Cautionary
Statements at the end of this document
|
Remarks
of
Kerry Killinger
Chairman
and CEO
|
Good
afternoon, everyone. Thank you for joining us today as we review the results
for
the fourth quarter and full year of 2007.
Joining
me
today on the call is Tom Casey, our CFO, who will discuss our quarterly
performance in more detail and update our 2008 earnings drivers. Our President,
Steve Rotella, will also be available to answer questions at the end of our
remarks this afternoon.
Fourth
Quarter and Full-year 2007 Earnings
Earlier
today, we announced our financial results for the fourth quarter and full-year
of 2007. As you all know, the second half of 2007 has been a period of extreme
stress and turmoil for the mortgage and credit markets. Our financial
performance reflects that market impact, as well as proactive efforts on
our
part to better position the company for a difficult environment going into
2008.
For
the
fourth quarter, we reported a net loss of $1.9 billion or $2.19 per share.
As we
announced in December, the loss was due to loan loss provisioning of $1.5
billion and a $1.6 billion after-tax non-cash writedown of Home Loans segment
goodwill. Due to the fourth quarter results, we also reported a net loss
of $67
million or $0.12 per diluted share for the full year 2007.
Clearly, these
results are disappointing, and as CEO, I take responsibility. Yes, the
environment was extraordinarily difficult, but we have to do better. It is
also my responsibility, along with the management team, to take the necessary
actions to return the company to strong profitability. And we
will.
We
took
the following significant steps in December to bolster the company’s capital and
streamline operations in anticipation of continued stress in the mortgage
and
credit markets:
|
·
|
The
issuance of convertible preferred stock, raising $2.9 billion of
new
capital and increasing our year-end tangible capital ratio to 6.67
percent, or $3.7 billion above our targeted ratio of 5.50 percent
or
more.
|
|
·
|
A
reduction in the quarterly cash dividend rate on the company’s common
stock to 15 cents per share.
|
|
·
|
A
major expense reduction initiative projected to reduce 2008 noninterest
expense by $500 million to $8.0 billion or
less.
|
|
·
|
And,
a significant acceleration in the strategic focus of our Home Loans
business, with increased emphasis on mortgage lending through our
retail
banking stores and other retail distribution
channels.
|
The
combination of these critical steps further fortifies WaMu’s strong capital and
liquidity position and enables the company to continue to pursue various
initiatives, particularly in our retail banking business which is at the
core of
our business strategy. I want all of you to know that we are
not done. We are committed to making changes, no matter how difficult,
that will speed our return to profitability.
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Prepared Remarks - January 17, 2008 |
Page
2
|
So
now,
let’s turn our attention to the topic of credit. Our credit performance and
near-term outlook are essentially unchanged from the projections we made
in our
press release in December. The fourth quarter provision totaled $1.5 billion,
roughly twice fourth quarter net charge-offs of $747 million, both within
our
December guidance.
Clearly,
the current downturn in housing is acute and deeper than expected. We continue
to see declining home prices, elevated inventories of unsold homes and increased
foreclosure activity. As has been very well-publicized, home values are
declining nationally and the downturn has been more severe in some of WaMu’s
larger markets, like California, than it has been nationally. However, I’d like
to point out that we continue to support measures that could strengthen the
housing market, including:
|
·
|
Aggressive
easing by the Fed,
|
|
·
|
Temporarily
raising the conforming limits for
GSEs,
|
|
·
|
Government
economic stimulus actions, and
|
|
·
|
Continued
efforts by lenders to help borrowers remain in their
homes.
|
Foreseeing
a difficult credit environment in 2008, we issued guidance in December
significantly increasing our first quarter provisioning to a range of $1.8
to
$2.0 billion and Tom will go into much more detail about our credit profile
and
outlook in his remarks.
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Prepared Remarks - January 17, 2008 |
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3
|
Reflecting
the strength of our franchise, the company generated revenue of $3.4 billion
in
the fourth quarter, a combination of strong net interest income and growth
in
depositor and other retail banking fee income. We achieved those revenues
despite the continued illiquidity in the capital markets during the quarter,
which resulted in net losses on the company’s trading and available-for-sale
securities portfolios of $528 million. Without those net valuation losses,
our
quarterly revenue would have increased to $3.9 billion.
We
expect
the revenue strength of our businesses, together with a capital cushion of
$3.7
billion above our target tangible capital ratio of 5.50 percent at year end,
to
enable us to manage through a severe credit period and return to our targeted
levels of financial performance thereafter.
Retail
Banking
The
Retail
Bank continued to perform well in 2007 delivering a year-over-year 12 percent
increase in noninterest income which far exceeded the 5 percent increase
in
noninterest expense. The modest increase in noninterest expense was driven
by a
rise in staffing levels as we opened new retail stores throughout the year,
along with the continuing emphasis on growing the company’s small business
activities.
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Prepared Remarks - January 17, 2008 |
Page
4
|
The
quarter’s decline in net income to $278 million from $456 million in the third
quarter reflected the increase in the provision for loan losses in the segment’s
home loan and home equity loan portfolios, which were pressured by the
deteriorating housing market. Pretax income from our Retail Banking network
excluding the loan loss provision totaled $3.3 billion in 2007, up 14 percent
from $2.9 billion in 2006.
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Prepared Remarks - January 17, 2008 |
Page
5
|
We
continued our strong customer growth trend in 2007. We added 1.1 million
net new
checking accounts during the year, exceeding our goal of adding more than
one
million net new checking accounts for the second consecutive year. Reflecting
the growth in new accounts, the average balance in noninterest checking accounts
was up by 7 percent year over year. And the continued attractiveness of our
Free
Checking product led to a 7 percent increase in retail banking households
to end
the year with just under 10 million households. The pace of increase in net
new
checking accounts slowed somewhat in the fourth quarter due to normal
seasonality and the closure of inactive accounts. Checking account sales
both in
our stores and online continued to be solid during the fourth quarter and
we
expect net new checking to show a nice increase in the first quarter of
2008.
As
we look
forward, we expect the Retail Bank to continue its strong growth trend and
continue to target more than one million net new checking accounts this year
and
expect to open between 100 and 150 new financial stores in our existing markets
in 2008.
Card
Services
Net
income
of $92 million in the fourth quarter for our Card Services group was up from
$66
million for the third quarter. Earnings were reduced, however, by valuation
losses of $159 million on retained interests, reflecting continued illiquidity
in the capital markets which drove higher discount rates. The quarter also
included a charge of $50 million arising from the VISA related litigation
liabilities. Visa also filed documents with the SEC in preparation for an
initial public offering. In connection with our ownership interest in Visa,
we
expect to recognize a benefit from their planned IPO.
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Prepared Remarks - January 17, 2008 |
Page
6
|
Managed
receivables at year end increased 16 percent over the past twelve months.
However, with a slowing of the economy and modestly higher rates of
unemployment, we are cutting back on direct marketing and focusing our efforts
to grow new accounts from WaMu’s retail customer base. We opened 653,000 new
credit card accounts in the fourth quarter. While overall account growth
was
down 31 percent on a linked quarter basis, the percentage of new customers
from
our retail channel has increased to 37 percent of the quarter’s production,
compared with 28 percent a year ago.
As
we have
said in the past, the primary external variable impacting Card’s credit quality
is the level of unemployment. In line with our expectations, we saw net credit
losses increase to 6.90 percent of average managed receivables from 6.37
percent
in the prior quarter. At the same time, the period-end 30+ day managed
delinquency rate increased to 6.47 percent from 5.73 percent in the third
quarter.
We
expect
further softening in the economy during 2008 and therefore are expecting
the
double digit managed receivables growth of the past two years to decline
to
mid-single digits as we adjust our management of the portfolio to that
environment. In the past we have stated that normal loss rates for our credit
card portfolio should be in the range of 7 to 8 percent, however, given the
economic softening projected for 2008 we anticipate that range of loss to
be
somewhat higher in the range of 8.5 to 9.5%. We are coming off a period of
cyclical lows for credit card losses, but as we have stated before, we expect
that the impact on our risk adjusted margins will be partially mitigated
through
our risk based pricing and fee strategies.
Commercial
Group
The
Commercial Group continued to deliver solid operating results in the fourth
quarter reporting net income of $94 million, up 62 percent from $58 million
in
the third quarter. Noninterest income improved somewhat from the third quarter
but continued to be negatively impacted by the lack of liquidity in the capital
markets in the fourth quarter.
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Prepared Remarks - January 17, 2008 |
Page
7
|
Commercial
Group loan volume totaled $4.8 billion for the fourth quarter, up 18 percent
from the prior quarter, driven by an increase in commercial real estate lending.
At the end of the year, the portfolio increased to $40.1 billion, consisting
of
$30.5 billion in multi-family loans and $9 billion of commercial real estate
loans. Credit quality continues to be very strong with net charge-offs for
the
quarter at less than 1 basis points. Despite the ongoing strong credit quality
of our Commercial Group, as with our credit cards, we are tightening our
underwriting and planning for less growth of this portfolio in
2008.
Home
Loans
As
we look
at our Home Loans business, it’s clear that the weakness in both the housing and
credit markets have led to a fundamental shift within the mortgage industry.
The
lack of liquidity for loans that are not backed by a mortgage agency guarantee
has shifted most lenders toward primarily originating conforming products.
At
this time, it is only banks with balance sheet capacity that are making
nonconforming loans. Reflecting this environment our Home Loans volume declined
28 percent on a linked quarter basis and we saw an increase in the percentage
of
conforming loan originations. On the positive side we are seeing high quality
in
the nonconforming loans we are originating but we are limiting our balance
sheet
growth to preserve our capital. In this environment we estimate the overall
mortgage origination market in 2008 will be approximately $1.5 trillion,
40
percent lower than 2007 originations.
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Prepared Remarks - January 17, 2008 |
Page
8
|
In
December we announced the plan to substantially adjust and resize our Home
Loans
business to reflect a smaller overall market, by:
|
·
|
Discontinuing
all remaining lending through our subprime mortgage
channel;
|
|
·
|
Closing
approximately 190 of 336 home loan centers and sales
offices;
|
|
·
|
Closing
nine Home Loans processing and call
centers;
|
|
·
|
Eliminating
approximately 2,600 Home Loans positions, or about 22 percent of
the
staff;
|
|
·
|
Eliminating
approximately 550 corporate and other support positions;
and
|
|
·
|
Closing
WaMu Capital Corp, our institutional broker-dealer business, as
well as
our mortgage banker finance warehouse lending
operation.
|
These
steps significantly accelerate our focus on mortgage lending through our
retail
banking stores and other retail distribution channels.
I’ll
now
turn it over to Tom.
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Prepared Remarks - January 17, 2008 |
Page
9
|
|
Remarks
of Tom
Casey
Executive
Vice
President and CFO
|
Thank
you,
Kerry.
The
second
half of 2007 was a period of unprecedented challenges in the mortgage and
credit
markets. The environment has been difficult for all financial institutions
– and
for Washington Mutual in particular – but I’m pleased with the steps we have
taken to strengthen our capital and liquidity position during this period
of
uncertainty.
My
comments today will focus on four key areas:
|
·
|
First,
in the past six months we have significantly reduced our exposure
to
market valuation changes. We have reduced the combination of our
trading
assets and loans held for sale by nearly 70 percent from $25 billion
at
the end of June to $8 billion at year end. Approximately 40 percent
of the
$8 billion was conforming loans held for sale to the agencies and
are
hedged by TBAs.
|
|
·
|
Second,
we are proactively managing our way through the housing correction
and are
focused on managing exposure to those loans most “at
risk”;
|
|
·
|
Third,
solid operating revenues and a substantial capital cushion above
our
targeted tangible capital ratio of 5.50 percent and disciplined
expense
management across all of our businesses are expected to provide
us the
financial flexibility to manage though this period of expected
elevated
credit costs.
|
|
·
|
Fourth,
we have sufficient liquidity to fund our business
operations.
|
I’ll
review each of these issues and our outlook on earnings drivers for 2008
in my
remarks this afternoon.
Market
Disruptions
Before
I
go into detail regarding the impact of the housing correction on our loan
portfolio I want to address the ongoing deterioration of the capital markets
during the fourth quarter. For the quarter we recognized $528 million of
net
losses in trading assets and available-for-sale securities. These losses
were
primarily in three areas: remaining trading assets of our institutional
broker-dealer operations, credit card retained interests and adjustments
in the
valuation of available-for-sale securities. While the capital markets remain
volatile, we have been proactive in reducing our market valuation exposure
as
you will see from the details I’m about to review.
Of
the
$528 million of losses, $267 million related to the mark-to-market on trading
assets in the fourth quarter. The $267 million is primarily comprised of
two
items. The first was a $159 million adjustment related to higher discount
rates
used in valuing our $1.8 billion in credit card retained interests.
The
second
relates to $83 million in trading losses by our broker-dealer, WaMu Capital
Corp., which is in the process of being closed due to our change in strategy
for
our Home Loans operations. At year-end, 42 percent of the $507 million of
these
securities were rated AAA. The book value of those securities rated AA or
below,
was 69 percent of the securities’ par value.
And,
the
other area we experienced write downs of assets was on our AFS portfolio
where
in the fourth quarter we recognized net losses of $261 million. At year-end,
93
percent of the $19 billion in AFS mortgage backed securities were rated AAA
and
less than 1 percent was below investment grade. All the other than temporary
impairment losses recognized in the quarter were on securities rated AA and
below. We have included a schedule of our remaining AFS portfolio and you
can
see that the securities below AAA have been marked down between 20 and 73
percent, depending upon their underlying collateral and rating. In total
the
book value of those securities was approximately 70 percent of the securities’
par value.
|
AFS
MBS
Portfolio by asset type
and
Investment grade
(in
millions)
|
AAA*
|
AA
|
A
|
A |
BBB
|
Below
IG
|
Total
|
|||||||||||||||||
|
Mortgage
Backed Securities
|
||||||||||||||||||||||||
|
Agency
|
$ | 7,193 | $ | - | $ | - | $ | - | $ | - | $ | 7,193 | ||||||||||||
|
Prime
|
3,801 | 540 | 161 | 73 | - | 4,575 | ||||||||||||||||||
|
Alt-A
|
600 | 175 | 68 | 74 | 23 | 940 | ||||||||||||||||||
|
Subprime
|
236 | 88 | 121 | 37 | 9 | 491 | ||||||||||||||||||
|
CMBS
|
6,014 | 17 | 10 | 9 | 6,050 | |||||||||||||||||||
|
Total MBS at Fair Value
|
17,844 | 820 | 350 | 194 | 41 | 19,249 | ||||||||||||||||||
|
Fair
Value as % of par value
|
99.3 | % | 81.4 | % | 72.3 | % | 55.6 | % | 27.7 | % | 96.5 | % | ||||||||||||
| Percent of Total MBS | 93 | % | 4 | % | 2 | % | 1 | % | - | % | 100 | % | ||||||||||||
*
Includes
not rated securities that are guaranteed by the U.S. Government or U.S.
Government sponsored agencies
Credit
Quality and Provision for Loan Losses
Now
lets
move on to credit quality and provision for loan losses. As Kerry mentioned,
the
fourth quarter’s net charge-offs and provision for loan losses were consistent
with the guidance we provided in December. The provision of $1.5 billion
was up
from $967 million in the third quarter and net charge-offs grew to $747 million
in the fourth quarter from $421 million in the prior quarter. At quarter
end,
our nonperforming assets ratio totaled 2.17 percent, up from 1.65 percent
at the
end of the third quarter.
Although
we are not seeing significant changes in early stage delinquencies, once
a
borrower is delinquent it is difficult for them to cure their loan because
home
prices in many areas of the country are not only deteriorating, but homes
are
also taking longer to sell. In addition, liquidity for consumers has decreased
with far fewer refinancing opportunities, especially for nonconforming loans.
We
don’t expect to see an end or reversal of this trend until the level of home
inventories peaks and starts to decline.
Another
driver of the increase is loan modifications for troubled borrowers and rising
real estate owned balances. We have been very proactive in modifying loans
to
keep our borrowers’ in their homes when possible. As a result we have seen a
dramatic increase in troubled debt restructurings reported as part of our
nonperforming assets. Approximately 56 percent of the $633 million in nonaccrual
TDRs were current with revised loan terms at year-end. We expect the level
of
modifications to continue to rise in 2008 as we continue our proactive practice
of modifying loans.
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Prepared Remarks - January 17, 2008 |
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11
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During
the
fourth quarter, we continued to see net charge-offs of subprime and home
equity
loans dominate net charge offs, accounting for approximately 70 percent of
the
total charge-offs on residential loans. These loans also continue to drive
the
majority of the increase in our provision. At year-end, our reserve for loan
losses was up 36 percent to $2.6 billion from the end of the third quarter
reflecting the effects of increases in NPAs and charge-offs in the second
half
of the year. The allowance for loan losses is up 65 percent from mid-year
2007.
In
order
to give you some perspective to evaluate the credit risk of our loan portfolio
we have grouped loans that are driving the majority of charge-offs by type,
LTV
and FICO. We expect the following three groups of high-risk loans to drive
the
majority of the credit losses going forward:
|
·
|
$18.6
billion in subprime loans;
|
|
·
|
$15.1
billion in home equity seconds with combined loan-to-values greater
than
80 percent that were originated in 2005 through 2007;
and
|
|
·
|
$2.1
billion of prime Option ARMs with loan-to-values greater than 80
percent
that were originated in 2005 through
2007.
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Prepared Remarks - January 17, 2008 |
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12
|
The
subprime portfolio is comprised of $16.1 billion in home loans and $2.5 billion
of home equity loans. You will note that this portfolio comprises 44 percent
of
our total residential loan net charge-offs but only represents 8 percent
of our
total real estate loan portfolio. The subprime portfolio is the group of
loans
that is responsible for the largest increase in our allowance for loan losses
in
2007. However, this portfolio is in runoff mode and shrank 7 percent in 2007.
As
it was the first portfolio to experience problems, we anticipate it will
be the
first to see delinquencies and losses peak. There has been significant press
regarding potential stress to the subprime borrower as a result of their
rates
adjusting upward. We have been very proactive in working with our subprime
customers to modify their loans to minimize that risk.
The
second
group of loans comes from our home equity portfolio. At year end only 30
percent
or $17.8 billion of our home equity loans were second lien and had original
CLTVs greater than 80 percent. Of that amount $15.1 billion of those loans
were
originated between 2005 and 2007 when home values were near their peak. So
we
have broken these out and identified them as being a high risk group. In
the
fourth quarter that group of loans comprised 26 percent of our total net
residential loan charge-offs but only 8 percent of our total real estate
loan
portfolio. Over the past two quarters we have seen the number of losses from
this portfolio as well as the severity of losses increase as home values
have
decreased. One additional important fact is that only 6 percent of our home
equity loans were originated through our wholesale channel as the majority
were
originated through our retail channels.
The
last
category is Option ARM loans. Option ARM loans with original LTVs above 80
percent totaled $3.4 billion, or 6 percent of the total Option ARM portfolio.
Approximately two thirds or $2.1 billion of these loans were originated
between 2005 and 2007. As you can see we don’t originate many loans at LTVs
above 80 percent. However, one of the key credit events in the life of an
Option
ARM is when the loan recasts and minimum payments can increase dramatically.
You
can see on the chart that we have approximately $4.8 billion or only 8 percent
of the portfolio that will be impacted by recasts in 2008. As a result of
recent
declines in CMT rates, the MTA index used for most of our Option ARM portfolio
has declined which is also taking pressure off these borrowers. The average
LTV
at origination of our Option ARM portfolio was 72 percent and the current
average FICO of 694. As a result, as has been the case historically, many
of
these borrowers may refinance their loans before the loan is recast. The
$2.1
billion of high-risk loans had an average LTV at origination of 90 percent
which
is why we have broken them out for you.
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Prepared Remarks - January 17, 2008 |
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13
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During
the
fourth quarter, these high risk loans collectively accounted for approximately
70 percent of our total real estate loan net charge-offs, but represented
only
19 percent of our total real estate loan portfolio at year end. When you
exclude
this group of loans, the remaining first lien loans have a weighted average
LTV
at origination of 66 percent and a current average FICO of 718, and the second
lien loans have an average combined LTV at origination of 66 percent and
current
average FICO of 740. So the remaining portfolio has a solid customer profile
with equity cushion to withstand declines in home values.
In
contrast to our home loans portfolio, our credit card, multi-family and
commercial real estate portfolios continue to perform well. The most significant
external factor affecting the performance of our card portfolio is the level
of
unemployment, which increased during the quarter. A linked quarter increase
of
30-plus day managed delinquencies to 6.47 percent from 5.73 percent and managed
net credit losses to 6.90 percent from 6.37 percent, were in line with our
expectations. We continue to proactively manage the credit quality of this
portfolio. As Kerry commented, we are coming off cyclical low levels of losses
for credit cards and we expect losses to increase in 2008 and be in the range
of
8.5 to 9.5 percent.
I’ll
provide my overall guidance for credit provisioning in a moment along with
the
other 2008 earnings drivers.
Solid
Revenues and Disciplined Expense Management
As
we
evaluate our performance for 2007 and deploy our business plans for 2008,
we
have good momentum in most of our core operations despite the ongoing disruption
in the capital and credit markets.
Net
interest income was up slightly in 2007 as an increase in net interest margin
to
2.85 percent from 2.60 percent in 2006 more than offset an 8 percent decline
in
average interest-earning assets as we deemphasized balance sheet growth.
Most of
this decline was due to our decision to sell most of our home loans production
in much of 2006 and the first half of 2007 which resulted in a reduction
in
average home loan balances of 18 percent year over year. We expect net interest
income to grow in 2008 primarily due to reductions we are seeing in the short
term rates, specifically 3 month LIBOR.
Noninterest
income in 2007 was down 5 percent from 2006 primarily due to approximately
$1
billion in trading and AFS losses related to the disruption in the capital
markets. Excluding the market valuation losses, noninterest income would
have
reflected solid improvement, especially by our Retail Bank. During 2007 the
Retail Bank added 1.1 million net new checking accounts and generated a 13
percent year-over-year increase in depositor and other retail banking fees.
We
expect this strong trend in retail banking growth to continue in
2008.
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Prepared Remarks - January 17, 2008 |
Page
14
|
We
continued to have tight controls on our operating expenses throughout 2007.
Noninterest expense, excluding the writedown of goodwill was essentially
flat
with 2006 despite including $143 million of expenses incurred in the fourth
quarter tied to expense reduction efforts targeted to lower 2008 noninterest
expense by approximately $500 million.
It’s
the
solid business plans in our Retail Bank, Card Services and Commercial Group
along with the significant strategic shift of our Home Loans business toward
the
strength of our retail distribution capabilities that will provide significant
revenues in 2008 to help offset the expected increase in credit
losses.
Capital
and Liquidity
We
continue to maintain a strong liquidly position in addition to a strong tangible
capital ratio of 6.67 percent. At year-end we had $3.7 billion of capital
in
excess of our target tangible equity to tangible asset capital ratio of 5.50%.
In addition, we exceeded all the well-capitalized banking ratios by a meaningful
margin. Our funding comes in large part from retail deposits generated in
our
stores from our core customers. We have $144 billion in retail
deposits which account for 49% of our total funding. The remaining
wholesale funding is diversified with a staggered maturity profile. At year
end
we had approximately $29 billion in available excess liquidity. This
amount includes FHLB borrowing capacity, other secured borrowing sources
and
cash/cash equivalents.
|
Strong
and Diversified Funding
|
|
Holding
Company
Tangible
Equity to
tangible assets of 6.67% ($3.7 billion above 5.50% target
ratio)
$4.4
billion in cash at the holding company
$1.0
billion in debt maturities in 2008 –
$
1.5
billion in 2009
No
commercial paper outstanding
|
|
WaMu
Bank Level
Tier
1 capital leverage ratio of
7.02% ($6.4 billion above 5.00% well
-
capitalized
minimum)
$144
billion in retail deposit funding (49% of total
funding)
$29
billion in available excess liquidity
Diversified
wholesale funding with staggered maturity
profile
|
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Prepared Remarks - January 17, 2008 |
Page
15
|
Earnings
Driver Guidance
Now
lets
move on to our earnings drivers. Given the uncertainty of the economy and
capital markets, 2008 performance is difficult to predict. However, the
following update is our best estimate of earnings drivers for 2008.
|
200
8
Earnings
Driver Guidance
|
|
|
Driver
|
200
8
Guidance
|
|
1)
Average assets
|
0
%
–
5
%
growth
|
|
2)
Net interest margin
|
2.
90
%
-
3.05
%
|
|
3)
Credit provisioning
|
Q1
‘08
$1.
8
billion
–
$
2.0
billion
|
|
4)
Depositor and other retail banking fees
|
12%
– 1
5
%
growth
|
|
5)
Noninterest income
|
≥
$6.0 billion
|
|
6)
Noninterest expense
|
≤
$8.0
billion
|
Average
Assets
We
ended
the year with total assets of $328 billion which was down slightly from the
end
of the third quarter. Average total assets for all of 2007 were $323 billion.
In
December we gave a range of 0 to 5 percent growth. As we look at the current
environment of a weaker economy and elevated provision levels we are still
looking to be in that range but at this point I expect us to be on the low
end
or just about flat year over year. We also anticipate it to be an ongoing
period
of elevated credit provisioning. Given that environment, we will be closely
managing our capital levels and therefore are expecting very little in the
way
of asset growth and our guidance is for average assets to be flat to up
5%.
Net
Interest Margin
The
net
interest margin of 2.85 percent for the fourth quarter was essentially flat
from
the third quarter despite an additional 50 basis points decline in Fed Funds
during the quarter, as illiquidity in the capital markets has limited the
3
month LIBOR rate from falling as much as Fed Funds rates. In
addition, deposit pricing pressures have reduced the positive impact from
the
lower fed funds rate. Since year end 3 month LIBOR has declined approximately
75
basis points due to improved liquidity and the anticipation of further rate
cuts
by the Fed. This will likely push our NIM to the high-end of our current
guidance range of 2.90 to 3.05 percent.
Credit
Provision
Our
credit
provision guidance is unchanged from what we stated in early December. We
expect
net charge-offs in the first quarter to be up 20 to 30 percent and the provision
to be in the range of $1.8 to $2.0 billion. While difficult to predict, we
expect the quarterly loan loss provisions for each of the remaining quarters
of
2008 to be at a similar level. If actual charge-offs differ from this
expectation then the provision will also be impacted.
An
additional caveat I need to make to that guidance relates to the management
of
our credit card portfolio where the timing of securitizations is difficult
to
predict. Given the uncertainty of the capital market it’s possible our forecast
for the timing and amount of card securitizations will change during 2008.
If we
retain more credit card receivables on our balance sheet we will need to
increase the provision. I will keep you updated each quarter.
|
|
Prepared Remarks - January 17, 2008 |
Page
16
|
Depositor
and other retail banking fees
As
in
2007, we are expecting to add more than 1 million net new checking accounts
in
2008. Given that expectation, our guidance for depositor and other retail
banking fees is an increase of 12 to 15 percent in 2008.
Noninterest
Income
Noninterest
income in the fourth quarter of $1.4 billion equates to an annualized run
rate
of $5.5 billion. However, the fourth quarter included about $500 million
of
market valuation adjustments and as I’ve reviewed with you earlier we expect we
will have less exposure in that area in 2008. We are also expecting the market
for nonconforming residential loans to remain illiquid so have modest
projections for gain on sale in 2008. Given these assumptions, our current
guidance for noninterest income in 2008 is to be at or above 2007 results
of $6
billion.
Noninterest
Expense
Noninterest
expense for 2007 totaled $10.6 billion but included a $1.8 billion charge
for
goodwill and $143 million for our expense reduction steps. Again, as we said
in
December we are targeting a reduction in noninterest expense to $8.0 billion
or
less in 2008.
In
conclusion, although we see good revenue growth and disciplined expense
management, the increased credit costs will make 2008 a challenging year.
However, we begin the year with a very strong capital position. We have
approximately $3.7 billion in capital above our target capital ratio of 5.50
percent. This excess equates to a capital cushion of $5.9 billion on a pretax
basis.
I’ll
now
turn it back over to Kerry for his closing comments.
|
|
Prepared Remarks - January 17, 2008 |
Page
17
|
|
|
Kerry
Killinger
Chairman
and CEO (continued)
|
Thanks,
Tom.
There's
no
question that elevated provisioning will impact earnings in 2008. But it
is also inevitable that provisioning will decrease with time. The key is
to separate the cyclical effects from the secular earnings power of the
company. Until 2007, this company had a 10-year average return on average
assets of 1.09%, which is consistent with our long term target of earning
high
teens ROCE. Until the environment improves, our senior leaders will be
primarily focused on credit, capital management, liquidity and expense
reduction.
In
addition, I hope it's clear that we will be uncompromising in our commitment
to
turn this company around. Performance is paramount. And to this end,
I will not accept a cash bonus for 2007, and bonuses for the management
team have been greatly reduced commensurate with our results. We all
understand that we have to do better – and we will.
We're
now
focused on 2008, which we know will be a challenging year.
However, we will not lose sight of the fact that we have a powerful
banking franchise that is at the center of our business strategies.
Our retail and small business banking efforts are paying off. Our card
services and commercial groups are vital and continue to do well. Our
brand is valuable and strong. Our core businesses continue to perform, and
we’re determined to leverage them to return WaMu to the level of profitability
our shareholders expect and deserve.
With
that,
Tom, Steve and I would be happy to take your questions.
1
Credit
Risk
Management
Q4
2007 Prepared Remarks Appendix
January
17, 2008
2
Loan
Portfolio Mix
$244.4
Billion
As
of 12/31/07
($
in billions)
1Single-Family
Residential excludes Custom and Builder Construction and home loans in the
Subprime Mortgage Channel.
2Home
Equity excludes home equity loans included in the Subprime Mortgage
Channel.
3Managed
Credit Card balances are $18.4 billion higher.
Single-Family
Residential1
$110.4
45%
Home
Equity2
$61.0
25%
13%
Multi-Family
$31.8
Subprime
Mortgage
Channel
$18.6
Credit
Cards3
$8.8
Other
Commercial
$11.4
Other
$2.4
7%
4%
5%
1%
3
1Excludes
Custom and
Builder Construction and home loans in the Subprime Mortgage
Channel.
2Estimated
loan-to-value
calculation based on OFHEO September 2007 data (released November
2007).
Current
FICO =
709
Original
LTV =
70%
Est.
Current LTV2 = 62%
Est.
Current LTV >90% =
2%
Est.
Current LTV >80% = 16%
Title:
Single-Family
Residential
Portfolio1
4
Current
FICO =
694
Original
LTV =
72%
Est.
Current LTV = 66%
Est.
Current LTV1 >90%
= 3%
Est.
Current LTV >80% =
25%
$0.01
$0.16
$0.89
$1.12
$66.3
$71.2
$63.6
$58.1
$1.30
$53.5
Current
>
original
balance as a % of loan balance
Option
ARM
Portfolio
Period
End Portfolio
Balance ($ in billions)
$1.50
$57.8
$1.73
$57.0
1Estimated
loan-to-value
calculation based on OFHEO September 2007 data (released November
2007).
5
Option
ARM Portfolio
Resets
Period
End Portfolio
Balance ($ in billions)
As of
12/31/2007.
Assumes
that
all included balances recast no earlier than five
years.
6
Current
FICO =
729
Original
Combined LTV =
73%
Est.
Current Combined LTV = 65%
Est.
Current Combined LTV2
>90% = 10%
Est.
Current Combined LTV
>80% = 29%
1Excludes
home equity
loans included in the Subprime Mortgage Channel.
2Estimated
combined
loan-to-value ratio based on OFHEO September 2007 data (released November
2007).
Home
Equity Loan / Home
Equity LOC Portfolio1
$43.6
$50.8
$52.9
$53.4
$55.8
$59.1
$61.0
7
1Comprised
of mortgage
loans purchased from recognized subprime lenders and mortgage loans originated
under the Long Beach Mortgage name and held for investment.
2Estimated
loan-to-value
ratio based on OFHEO September 2007 data (released November
2007).
3Estimated
combined
loan-to-value ratio based on OFHEO September 2007 data (released November
2007).
Home
Loans
Current
FICO =
607
Original
LTV =
78%
Est.
Current LTV = 70%
Est.
Current LTV2 >90%
= 7%
Est.
Current LTV >80% =
28%
Home
Equity
Current
FICO =
673
Original
Combined LTV = 94%
Est.
Current Combined LTV
= 92%
Est.
Current Combined LTV3
>90% = 67%
Est.
Current Combined LTV
>80% = 89%
$19.2
Subprime
Mortgage Channel
Portfolio1
$21.2
$20.8
$20.4
$20.5
$20.0
$18.6
8
Subprime
Mortgage Channel1
Resets
Period
End Portfolio
Balance ($ in billions)
1Comprised
of mortgage
loans purchased from recognized subprime lenders and mortgage loans originated
under the Long Beach Mortgage name and held for
investment.
9
1Other
Commercial consists
of Other Real Estate and Commercial Loans.
2Charge-off
for Other
Commercial are almost entirely driven from discontinued operations, a $1.9
billion portfolio.
1
$31.2
$32.8
$38.6
$38.0
$38.0
Commercial
Portfolio
$41.0
$43.2
2
10
1Data
presented for
periods prior to 4Q ‘05 is for Providian Financial Corp.
Managed
Card Services
Portfolio
1
11
Nonperforming
Assets
12
1Net
charge-offs and
provision for 2005 reflect the acquisition of Providian on
10/1/2005.
Allowance
for Loan and
Lease Losses
1
13
Current
Credit Quality Metrics –
Home
Loans Portfolio
1Includes
first-lien home
loans in the subprime mortgage channel.
2Estimated
loan-to-value
calculation based on OFHEO September 2007 data (released November
2007).
3Includes
the HELOC and
HEL portfolios and home equity loans in the subprime mortgage
channel.
4Estimated
combined
loan-to-value calculations based on OFHEO September 2007 data (released November
2007).
5Current
FICO scores
refreshed with TransUnion data.
December
2007
14
Single-family
Residential
Portfolio1
Loan-to-Value
at
Origination
1Excludes
Custom and
Builder Construction and home loans in the Subprime Mortgage
Channel.
2Excludes
accounting
adjustments and invalid vintage and OLTV values; negative amortization is
included in the loan balances.
3Estimated
loan-to-value
calculation based on OFHEO September 2007 data (released November
2007).
15
Single-Family
Residential
Option ARMs1
Loan-to-Value
at
Origination
1Excludes
Custom and
Builder Construction and home loans in the Subprime Mortgage
Channel.
2Excludes
accounting
adjustments and invalid vintage and OLTV values; negative amortization is
included in the loan balances.
3Estimated
loan-to-value
calculation based on OFHEO September 2007 data (released November
2007).
16
1st
&
2nd
Lien Home
Equity Portfolio1
Loan-to-Value
at
Origination
1Excludes
home equity
loans included in the Subprime Mortgage Channel.
2Excludes
accounting
adjustments and invalid vintage and CLTV values.
3Estimated
loan-to-value
calculation based on OFHEO September 2007 data (released November
2007).
17
2nd
Lien Home Equity
Portfolio1
Loan-to-Value
at
Origination
1Excludes
home equity
loans included in the Subprime Mortgage Channel.
2Excludes
accounting
adjustments and invalid vintage and CLTV values.
3Estimated
loan-to-value
calculation based on OFHEO September 2007 data (released November
2007).
18
Subprime
Mortgage
Channel1
Loan-to-Value
at
Origination
1Comprised
of mortgage
loans purchased from recognized subprime lenders and mortgage loans originated
under the Long Beach Mortgage name and held for investment.
2Excludes
accounting
adjustments and invalid vintage and CLTV values.
3Origination
loan-to-value
used for 1st liens and combined loan-to-value used for 2nd
Liens.
4Estimated
loan-to-value
calculation based on OFHEO September 2007 data (released November
2007).
19 Single-Family
Residential
Delinquency
90+ ($
OTS) Option ARM Delinquency 90+ ($ OTS)
Home
Equity Delinquency
90+ ($ MBA) Subprime Delinquency 90+ ($ OTS) WaMu delinquencies vs.
industry averages
Delinquencies
–
2005
to
2007 Vintage 1 SFR 90+ return somewhat better than industry Option ARMs
performance slightly better than industry Home equity performance comparable
to
industry Subprime performance somewhat better than
industry 1LoanPerformance TS Securities through November
2007. 2LoanPerformance HELOC/Seconds through November 2007. 1
1 2
20
This
presentation contains forward-looking statements, which are not historical
facts
and pertain to future operating results. These forward-looking statements
are
within the meaning of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include, but are not limited to, statements
about our plans, objectives, expectations and intentions and other statements
contained in this document that are not historical facts. When used in this
presentation, the words “expects,” “anticipates,” “intends,” “plans,”
“believes,” “seeks,” “estimates,” or words of similar meaning, or future or
conditional verbs, such as “will,” “would,” “should,” “could,” or “may” are
generally intended to identify forward-looking statements. These forward-looking
statements are inherently subject to significant business, economic and
competitive uncertainties and contingencies, many of which are beyond our
control. In addition, these forward-looking statements are subject to
assumptions with respect to future business strategies and decisions that
are
subject to change. Actual results may differ materially from the results
discussed in these forward-looking statements for the reasons, among others,
discussed under the heading “Factors That May Affect Future Results” in
Washington Mutual’s 2006 Annual Report on Form 10-K and “Cautionary Statements”
in our Forms 10-Q for the quarters ended March 31, 2007, June 30, 2007 and
September 30, 2007 which include:
Volatile
interest rates
and their impact on the mortgage banking business;
Credit
risk;
Operational
risk;
Risks
related to credit
card operations;
Changes
in the regulation
of financial services companies, housing government-sponsored enterprises
and
credit card lenders;
Competition
from banking
and nonbanking companies;
General
business, economic
and market conditions;
Reputational
risk;
Liquidity
risk;
and
Valuation
risk.
There
are other factors
not described in our 2006 Form 10-K and Forms 10-Q for the quarters ended
March
31, 2007, June 30, 2007 and September 30, 2007 which are beyond the Company’s
ability to anticipate or control that could cause results to
differ.
Cautionary
Statements