Exhibit
99.3
Washington
Mutual, Inc.
Prepared
Remarks for Third Quarter 2006 Earnings Conference Call
October
18, 2006
Please
see the Forward-Looking Statement at the end of this
document
|
Remarks
of Kerry Killinger
Chairman
and CEO
|
Well,
good
afternoon and thank you for joining us today for a review of our third
quarter
results.
Q3
2006 Earnings
Earlier
today, we announced third quarter net income of $748 million or $0.77
per
diluted share. Our earnings included net after tax charges of $31 million,
or 3
cents per share associated with the sale of $2.5 billion in mortgage
servicing
rights that we talked about on our last call. This quarter’s earnings were also
reduced by after tax charges of $33 million, or $0.04 per share, related
to the
company's ongoing productivity and efficiency initiatives.
The
Board
once again increased the quarterly cash dividend by one cent to 53 cents
per
share. This now marks the 45th consecutive quarter we’ve done so. Tom will go
into more detail on our capital management and share repurchase
activities.
Our
third
quarter results reflect the short-term impact of the MSR sale and our
productivity and efficiency initiatives, as well as the challenging interest
rate and operating environment that is affecting banks generally. As
I said on
last quarter’s call and again at our Investor Day in September, we fully
anticipated that the MSR sale, the sale of our retail mutual fund management
company and our productivity and efficiency initiatives would produce
unevenness
in our quarterly earnings during the remainder of 2006, and we’ve seen that
impact in the earnings we announced today. Nevertheless, when taken together,
we
continue to expect that these actions will be accretive to earnings in
2007.
We
are on
track to close the sale of our retail mutual fund management business
late in
the fourth quarter and expect to record in that period a gain from the
sale of
approximately $650 million. We also expect that the gain will more than
offset the negative impact of the MSR sale and our productivity and efficiency
initiatives on full-year 2006 earnings.
In
the
third quarter, we continued to feel the effects of the difficult interest
rate
environment throughout our operations. Because the Fed increased rates
throughout the second quarter, Fed funds averaged 35 basis points higher
in the
third quarter than in the second quarter, despite the Fed’s pause in August. In
addition, the yield curve became inverted during the third quarter. Both
of
these conditions contributed to further compression in our net interest
margin
during the third quarter.
Looking
forward, as a point of reference, during the last cycle of Fed tightening,
our
net interest margin didn’t bottom out until the first quarter after the last Fed
increase. Therefore, assuming we’ve seen the last of the Fed increases, we
expect that our net interest margin has bottomed out for this cycle and
will
begin to recover in the fourth quarter.
Given
this
environment, we were pleased with the strong results we saw in the quarter
from
our Retail Banking group and Card Services segment and the solid underlying
performance in our Commercial Group. However, our Home Loans business
continues
to underperform in this extremely challenging operating environment,
which
includes an inverted yield curve, declining volumes and continued overcapacity
in the mortgage industry.
Despite
the challenging environment impacting the mortgage banking industry,
we feel
good about the proactive steps we have taken. Our portfolio remains in
very good
shape and nonperforming assets remain very low. The housing market is
clearly
weakening, with the pace of housing price appreciation slowing in most
regions
of the country. We are also experiencing somewhat higher delinquencies
and loan
losses. However, we began preparing for this possibility quite some time
ago and
took defensive actions to strengthen our portfolio. So we believe we
are well
prepared to weather the more difficult credit environment. We also believe
that
the expansion in our net interest margin should more than offset the
higher
credit costs, as Tom will review with you later in his guidance for
2007.
In
the
meantime, we continued to aggressively attack the cost structure in our
Home
Loans business during the quarter and reduced noninterest expense by
21 percent
over the same period a year ago. This was achieved through key productivity
and
efficiency initiatives. Technology and off-shoring initiatives currently
underway are expected to result in further expense reductions in future
quarters.
We
have
significantly modified our Home Loans strategy to be consistent with
our overall
business model and continue to take appropriate actions to right-size
the
business for the contracting mortgage lending market.
Retail
Banking
Our
Retail
Banking operations continued their strong performance in the third quarter.
Income from continuing operations of $651 million was up 10 percent from
the
same quarter a year ago. Retail banking net income, excluding the contribution
from portfolio management, was up 29 percent from the same quarter a
year
ago.
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Prepared
Remarks - October 18, 2006
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3
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Our
new
WaMu Free Checking™ product continued to drive strong growth in checking
accounts. Net checking accounts in retail and small business combined
were up
21 percent from the third quarter a year ago, with over 307,000 net new
accounts continuing to benefit from the second quarter launch of our
new WaMu
Free Checking™. Year to date, our net new checking accounts of 1.1 million were
up more than 50 percent over the same period last year.
New
account growth contributed to an increase in depositor and other retail
banking
fees to $655 million in the third quarter, up 13 percent from last year
and 17
percent year to date.
In
the
third quarter, retail banking households were up 10 percent year over
year and
3 percent on a linked quarter basis.
On
the
deposit front, average retail deposits grew one percent from the prior
quarter
including 6 percent growth in our small business deposits, which were
up 19
percent year over year.
We
opened
25 new stores during the third quarter, bringing the total to 89 for
the year.
At the same time, we have continued to drive improved operating efficiency,
reducing our operating expenses 3 percent on a linked quarter
basis.
Card
Services
Turning
to
Card Services…
Card
Services delivered another quarter of excellent financial performance.
Net
income of $210 million was up $27 million, or 15 percent, from the second
quarter.
Managed
receivables growth of 4 percent on a linked quarter basis was very strong,
with
quarter-end balances at just under $22 billion, reflecting increases
across all
of our marketing channels. The ending balance does not include $403 million
in higher risk accounts designated as held for sale in the quarter in
anticipation of a sale planned for the fourth quarter.
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Prepared
Remarks - October 18, 2006
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Total
new
accounts of 815,000 in the quarter were on par with the second quarter
with
strong performance in both the national and retail channels. On the partnership
front, we launched a comprehensive affinity credit card for sports fans
- the
ESPN Total Access Visa card - on September 1.
Credit
ratios for the third quarter remained very strong compared to historic
averages.
While net credit losses for the quarter were down from the second quarter
to
5.68 percent, 30-plus day delinquencies did go up to 5.53 percent at
quarter end. And, while delinquencies in general were up, the impact
was
mitigated by a reduction in delinquent accounts related to the planned
sale of
higher risk accounts.
Commercial
Group
Despite
the challenging interest rate environment, the Commercial Group continued
to
drive strong loan volume in the quarter at $3.1 billion, up 3 percent
from the
third quarter a year ago and up 5 percent from the prior quarter.
Net
income
of $101 million for the quarter, which was down 3 percent from last year’s third
quarter and up slightly from the second quarter, continued to feel the
impact of
margin compression resulting from the repricing lag in our adjustable-rate,
multi-family loan portfolio.
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Prepared
Remarks - October 18, 2006
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Average
loan balances for Commercial, which are comprised primarily of multi-family
loans, increased 7 percent from the same quarter in the prior year and
3 percent
from the prior quarter and partially offset the impact of the margin
compression
in both quarters.
We
continue to be pleased with this business and continue to invest in growth,
adding loan consultants in New York and other Northeast markets.
We
completed our acquisition of Commercial Capital Bancorp on October 1,
further
enhancing our commercial and retail banking business in California and
further
diversifying the asset generation capabilities and sources of earnings
for the
company. The combination adds $4.1 billion in primarily multi-family
loans.
Home
Loans
As
I
mentioned earlier, our Home Loans results reflect the impact of current
interest
rates and the competitive environment. For the third quarter, Home Loans
reported a net loss of $33 million versus net income of $302 million
in the
prior year and $31 million on a linked quarter basis.
Home
loan
volume declined by 11 percent on a linked quarter basis and 32 percent
from the
third quarter of last year, commensurate with higher interest rates and
the
general slowing of the housing market. We are seeing the effects of our
strategy
to shift toward higher margin products. This is reflected in the mix
of
originations during the quarter. Fixed-rate originations declined from
39 percent of home loan volume in the third quarter of last year to 26
percent in the most recent quarter. Option ARMs continued to comprise
approximately 30 percent of volume, similar to the same quarter a year
ago, but
hybrid ARMs were much more popular, growing from only 29 percent last year
to 44 percent of volume in the third quarter
.
Both
our
gain on sale and MSR hedging costs are being negatively impacted by the
difficult interest rate environment and competitive pressures. Tom will
go into
more detail regarding the performance of both of these items. I will
just offer
the following:
We've
taken a number of specific actions, both strategic and tactical, to position
the
Home Loans business for focused growth. We're continuing our efforts
to produce
greater volumes of higher margin loans and an efficient operating
platform.
Finally,
we've established a clear strategic direction by which we will drive
our actions
over the next few years.
Summary
Before
I
turn the call over to Tom, I’d like to comment on the Interagency Guidance on
Nontraditional Mortgage Product Risks issued by the banking regulators
at the
end of September.
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Prepared
Remarks - October 18, 2006
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6
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We
continue to evaluate the guidance. However, based on preliminary analysis
and
initial discussions with our regulator, the OTS, while we expect some
changes,
the impact on the origination of the Option ARM products in our Home
Loans group
appears limited.
For
the
guidance to be truly effective in safeguarding consumers, we do believe
all
mortgage lenders should be held to the same standards.
As
we have
said, the Option ARM product is an attractive product for many of our
customers
and we remain committed to offering a range of products to meet their
needs. We
have more than 20 years experience underwriting and originating Option
ARM loans
through many market cycles. We understand that the best mortgage customer
is a
well-informed borrower. That's why we focus on providing clear, understandable
disclosures for our customers and ongoing training for our sales
force.
The
quality of our Option ARM portfolio remains strong. At the end of the
third
quarter, the current estimated loan-to-value ratio of our Option ARM
portfolio
was 57 percent, with an average FICO of 707.
I’ll
now
turn it over to Tom to go into more specifics on our financial
performance.
|
Remarks
of Tom Casey
Executive
Vice President and
CFO
|
This
has
been a very active quarter with the closing of our MSR sale, announcement
of the
sale of our retail mutual fund management business and ongoing operating
efficiency initiatives. All these activities are designed to position
us for a
much stronger financial performance next year and at the end of my remarks,
I’ll
review our current outlook for 2007.
Asset
Growth and Net Interest Margin
So
let’s
start by looking at asset growth. We held average assets relatively flat
with
the second quarter at approximately $350 billion. Year over year asset
growth
was 7 percent. However, while there was little average asset growth over
the
prior quarter, we did see some remixing in our average assets as single-family
residential mortgages were down $2.2 billion, and prime home equity was
up $991
million, multi-family was up $809 million and on-balance sheet card receivables
were up $610 million.
The
third
quarter net interest margin of 2.53 percent was down 12 basis points
from 2.65
percent in the second quarter. While the yield on our earning assets
increased
21 basis points in the quarter, this was more than offset by a 36 basis
point
increase in the cost of our interest-bearing liabilities. While the Fed
“paused”
in August, short-term rates were up in the quarter driving increases
in
wholesale borrowing rates and the cost of deposits as consumers continue
to move
funds to higher rate money market and CD products.
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Prepared
Remarks - October 18, 2006
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7
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Credit
Shifting
to credit.
As
expected, the credit environment appears to be normalizing after a period
of
historically low levels of credit losses. Net charge-offs were up $38
million
from the second quarter, primarily driven by a $21 million increase in
charge-offs in specialty mortgage finance. Nonperforming assets were
up
$232 million to 69 basis points of total assets, up 7 basis points from the
second quarter, but still well within our target of below one
percent.
The
provision for loan and lease losses of $166 million in the third quarter
reflected a slight decline in the loan portfolio, as well as net charge-offs
of
$154 million. The third quarter provision also reflected refinements
to our
reserve methodology and an adjustment of the provision related to the
planned
sale of $403 million of higher risk credit card accounts. Without the
impact of
these two items, the provision would have been similar to that of the
second
quarter.
Credit
card managed delinquencies were up 30 basis points in the quarter to
5.53
percent. Adjusting for the $403 million planned sale, delinquencies would
have
been 5.99 percent, as they return to a more normal level after the change
in
bankruptcy regulation last year.
Noninterest
Income
Noninterest
income of $1.6 billion was flat from the second quarter, but up 30 percent
over
the third quarter of last year. The year-over-year increase was due primarily
to
the addition of $534 million in Card Services income and higher depositor
and other retail banking fee income.
Depositor
and other retail banking fees of $655 million were up 13 percent from
the third
quarter of 2005, due to strong account growth. On a linked quarter basis
depositor fees were up a modest 2 percent. Adjusting for the one-time
incentive
payment of $21 million from Master Card in the second quarter, depositor
and
other retail banking fees would have been up 6 percent on continued strong
account growth.
As
Kerry
discussed, the Home Loans business continues to be challenged by lower
volume
from the slowdown in the housing market and a difficult interest rate
environment. Reflecting these pressures, gain on sale in the third quarter
was
$119 million, down from $251 million in the second quarter.
Declining
mortgage rates and an inverted yield curve during the quarter created
a more
expensive hedging environment for the MSR. As a result, MSR hedging costs
for
the quarter were $78 million, up from $45 million in the second
quarter. Given the more challenging hedging environment, we benefited
from
having completed the sale of approximately one third of our servicing
portfolio
on July 31st. As a result, the third quarter had two months of lower
hedging
costs, but future quarters will see the full impact.
Noninterest
Expense
Looking
at
noninterest expense, on a year-over-year basis the addition of Card Services
and
the costs associated with our growth initiatives pushed expenses up 17
percent.
For
the
quarter, expenses of $2.2 billion were down slightly as we reduced the
number of
employees by 9 percent during the third quarter.
Third
quarter expenses included $58 million in costs associated with the MSR
sale and
$52 million in charges related to our ongoing productivity and efficiency
efforts. Adjusting for these items, our annual noninterest expense run
rate in
the third quarter was $8.3 billion.
Capital
Management
Before
I
go through our outlook for the rest of ’06 and ’07, I want to highlight a few
items in the capital management and funding area.
As
part of
our ongoing efforts to enhance our capital structure and diversify our
funding
sources, we undertook several important transactions during the quarter.
First,
we issued $500 million in perpetual preferred stock, which allows us
to reduce
our cost of capital as well as partially fund our stock buyback program.
During
the quarter, we repurchased 18.8 million shares of common stock through
a
combination of open market and accelerated share repurchases.
We
also
expanded our fixed income investor base with our first euro-denominated,
sub-debt deal totaling 1.5 billion euros, as well as a $5.1 billion European
covered bond transaction. The covered bond deal was the first by a U.S.
bank and
represents a new form of funding at attractive rates to reduce our dependence
on
the FHLB system.
At
quarter
end, our tangible capital ratio was 5.86 percent, well in excess of our
target
ratio of greater than 5.50 percent as we held capital levels temporarily
higher
to accommodate the acquisition of CCBI which closed on October 1st.
Earnings
Driver Guidance
Now
let’s
walk through our present view concerning our six earnings drivers for
the
remainder of this year and then what we see for 2007.
|
Driver
|
2006
Guidance
|
2007
Guidance
|
|
1)
Average assets
|
5-7%
growth
|
0
- 5% growth
|
|
2)
Net interest margin
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2.60
- 2.65%
|
2.85
- 2.95%
|
|
3)
Credit provisioning
|
$650-750
million
|
$850
- $950 million
|
|
4)
Depositor and other retail banking
fees
|
15-17%
growth
|
10
- 12% growth
|
|
5)
Noninterest income
|
$6.3-6.5
billion
|
$6.5
- $6.8 billion
|
|
6)
Noninterest expense
|
$8.6-8.8
billion
|
$8.3
- $8.5 billion
|
|
7)
Discontinued operations
|
$700
million
|
--
|
| 1) |
Average
assets
|
For
the
first nine months of this year, our average assets are up 6 percent from
average
assets for all of 2005. Although credit spreads improved modestly in
the third
quarter, they still remain relatively tight from historical levels. Due
to the
limited attractiveness of balance sheet growth and the relative appeal
of the
risk-adjusted returns from share repurchases, we don’t see much asset growth
between now and the end of the year. So I don’t see much change to our 5 to 7
percent growth for 2006.
Looking
forward into 2007, at least for the first half, we don’t see a lot of
opportunities to grow the balance sheet. So right now, our outlook has
the
balance sheet growing between 0 and 5 percent. Within this range, we
will be
disciplined across all asset categories, adding loans to the balance
sheet only
when market conditions and returns warrant doing so. In the meantime,
we expect
to continue to deploy capital through the payment of dividends and stock
buybacks, while maintaining the flexibility to more aggressively grow
the
balance sheet should the opportunity arise.
| 2) |
Net
Interest Margin
|
Assuming
the Fed is done tightening rates, we expect to see some improvement in
the NIM
in the fourth quarter, partially offset by continued pressure on deposit
pricing
and funding costs. Year to date, our NIM is 2.64 percent, so with some
improvement from the third quarter level of 2.53 percent, I think we
will come
in for the year at around 2.60 to 2.65 percent.
For
2007,
we anticipate additional recovery in our net interest margin, primarily
driven
by asset repricing, along with our ongoing asset remix. But the projected
interest rate environment remains difficult. The yield curve is expected
to
remain inverted in the short-term with the forward curve indicating potential
steepening towards the end of 2007, when short-term rates are expected
to
decline. With that assumption, we expect our margin to be in the range
of 2.85
to 2.95 percent for the full year. If the slope of the curve steepens
more
quickly, we would expect further improvement in our net interest margin.
However
if short term rates begin to rise again that would put additional pressure
on
our NIM outlook.
We’ll
continue to monitor this closely and provide updates on our outlook each
quarter.
| 3) |
Credit
provisioning
|
Year-to-date,
our provision for loan and lease losses is at $472 million. As we are
seeing
increases in nonperforming assets, delinquencies and charge-offs, we
anticipate
a higher level of provisioning in the fourth quarter. Therefore, we expect
our
full-year 2006 provision to be at the higher end of our range of $650
to $750
million.
For
2007,
taking into consideration the likelihood of a more challenging credit
environment, as well as continued remixing of our assets including growth
in
card receivables, we are currently expecting our credit provision to
be in line
with the range of $850 to $950 million.
| 4) |
Depositor
and Other Retail Banking
Fees
|
Year
to
date, depositor and other retail banking fees are up 17 percent. Given
the
continued strong net new account growth and fee income driven by our
new WaMu
Free Checking™ product, we are maintaining our current 2006 guidance for growth
in depositor and other retail banking fees in the range of 15 to 17
percent.
We
anticipate much of the momentum in household and account growth to continue
in
2007, but coming off an extremely strong year in 2006, we are expecting
depositor and other retail banking fee growth in the range of 10 to 12
percent
for next year.
| 5) |
Noninterest
Income
|
In
looking
at noninterest income for 2006, we are currently at $4.8 billion year to date.
While lower gain on sale is putting pressure on noninterest income, with
the
continued strength of our retail banking fees and credit card income
we still
expect to come in within the range of $6.3 billion to $6.5 billion for the
year.
For
2007,
we are not changing our forecast for noninterest income from the range
of $6.5
to $6.8 billion. We anticipate that the year-over-year growth will be
attributable to growth in depositor and other retail banking fees - the
primary
driver of noninterest income - as we expect revenue from Home Loans to
remain
under pressure with lower volumes and lower gain on sale for mortgage
loans.
| 6) |
Noninterest
Expense
|
Now,
noninterest expense.
Year
to
date, our noninterest expense is at $6.6 billion. With the acceleration
of our
productivity initiatives and costs associated with the MSR sale, we expect
to be
at the higher end of our range of $8.6 to $8.8 billion.
However,
we’ve made great progress this year, as our annualized run rate in the third
quarter was $8.3 billion, when you exclude the costs associated with
our
productivity initiatives and the MSR sale.
For
2007,
we fully expect to continue to fund our growth, while benefiting from
a net
decrease in our expense base. Reflecting this improved expense base and
the sale
of our retail mutual fund management business, we currently expect our
expenses
to be between $8.3 and $8.5 billion in 2007.
| 7) |
Discontinued
Operations
|
Finally,
discontinued operations…
We
expect
to close the sale of our retail mutual fund management business late
in the
fourth quarter and to record in the period an estimated gain of approximately
$650 million, maintaining our pretax guidance for income from discontinued
operations, including WM Advisors’ operating earnings for the year, at
approximately $700 million.
I’ll
now
turn it back over to Kerry for his summary comments.
Let
me
wrap this up by saying that 2006 is a transition period for the company
setting
the stage for much stronger performance in the future.
During
this period, the management team has worked diligently to make the tough
decisions that will drive productivity, while lowering costs and improving
service levels. This is hard work and I’m proud of what we’ve
accomplished.
| · |
Excluding
the charges for our efficiency initiatives and costs related
to the sale
of our mortgage servicing rights, our noninterest expense annualized
run
rate of $8.3 billion is down 9 percent in the third quarter
from $9.1
billion in the fourth quarter of
2005.
|
| · |
We
reduced the number of employees by 16 percent, or nearly 10,000
year to
date, due in part to our success in offshoring approximately
3,700
additional positions. This leveraging of offshore resources
not only
significantly reduces expense, but also makes our cost structure
more
responsive to changing business
volumes.
|
| · |
We
also relocated many of our back office positions to lower cost,
domestic
locations, such as San Antonio and
Jacksonville.
|
| · |
In
our Home Loans group, we have been very aggressive in right-sizing
our
operations to the slowing mortgage market, reducing our noninterest
expense by 21 percent over the past 12
months.
|
| · |
And,
in the process of integrating Card Services, we achieved every
goal we set
out when we announced the acquisition and, in fact, exceeded
our estimated
cost savings by 60 percent.
|
So
overall, while I’m pleased with the progress on our business initiatives, due to
the difficult operating environment, it’s yet to be reflected in our bottom
line. But, as we look forward to next year, assuming that the economy
slows but
remains relatively healthy and short-term interest rates are stable as
Tom
described, we believe that our net interest margin should show nice recovery
and
more than offset the higher credit costs anticipated from a more normalized
credit environment.
We
also
see increases in our noninterest income driven by growth in our Retail
Banking
and Card Services operations, yet lower operating expenses - all of which
will
bode well for improved operating performance next year.
With
that,
Steve, Tom and I are happy to field your questions.
Forward
Looking Statement
This
release 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 2005
Annual Report on Form 10-K/A and “Cautionary Statements” in our Form 10-Q/A for
the quarter ended March 31, 2006 and Form 10-Q for the quarter ended
June 30,
2006 which include:
| § |
volatile
interest rates which impact the mortgage banking business;
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| § |
rising
interest rates, unemployment and decreases in housing prices
impact credit
performance;
|
| § |
risks
related to the option adjustable-rate mortgage product;
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| § |
risks
related to subprime lending;
|
| § |
risks
related to the integration of the Card Services business;
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| § |
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 and economic conditions, including movements in interest
rates,
the slope of the yield curve, and the potential overextension
of housing
prices in certain geographic markets;
and
|
| § |
negative
public opinion which may impact the Company’s reputation.
|
There
are
other factors not described in our 2005 Form 10-K/A and 2006 Forms 10-Q
and
which are beyond the Company’s ability to anticipate or control that could cause
results to differ.