WaMu Reports Significant Build-Up of Reserves Contributing to Second Quarter Net Loss of $3.3 Billion
Company Increases Capital Levels
Company Expects to Reduce Expenses by $1 billion
SEATTLE--(BUSINESS WIRE)--WaMu (NYSE:WM) today announced a second quarter 2008 net loss of $3.33 billion as it significantly increased its loan loss reserves by $3.74 billion to $8.46 billion. The quarter’s loss compares with the first quarter net loss of $1.14 billion and net income of $830 million during the second quarter of 2007. The quarter’s financial results reflect an elevated level of provisioning due in large part to changes in the company’s provisioning assumptions in response to continued declines in housing prices nationwide. These changes had the effect of accelerating provisions into the quarter. The quarter’s provision was $5.9 billion compared with $2.2 billion of net charge-offs. The company now expects the remaining cumulative losses in its residential mortgage portfolios to be toward the upper end of the range it disclosed in April, and continues to expect 2008 to be the peak year for provisioning.
The company’s tangible equity to total tangible assets capital ratio increased during the second quarter to 7.79 percent from 6.40 percent in the first quarter, resulting in approximately $7 billion of capital in excess of its targeted 5.50 percent level. The increase reflects the effects of the $7.2 billion capital raise, the reduction of the company’s balance sheet by $10 billion and the loss for the quarter. The company also maintained strong levels of liquidity during the quarter, with over $40 billion of readily available liquidity at quarter end.
“In the face of unprecedented housing and mortgage market conditions, we are continuing to execute on a comprehensive plan designed to ensure that we have strong capital and liquidity, an appropriately-sized expense base and a strong, profitable retail franchise,” said WaMu Chief Executive Officer Kerry Killinger. “Our recent $7.2 billion capital raise, combined with the other proactive steps we have taken this quarter to strengthen our banking franchise and further expense reductions, continue to move us toward achieving these goals.”
Killinger also said that the company now expects to realize annualized cost savings of approximately $1 billion which will contribute to improved pretax, pre-provision earnings. “We remain confident that we have sufficient capital to successfully manage our way through this challenging period,” Killinger added.
The company reported a second quarter diluted loss per share of $6.58, which included a previously disclosed one-time earnings per share reduction in the amount of $3.24 related to the company’s capital issuance in April. Excluding this one-time reduction, the company’s second quarter loss per common share was $3.34. This non-cash reduction in earnings per share, which resulted in a reclassification within stockholders’ equity, had no effect on the company’s capital ratios or the net loss recorded in the second quarter.
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SECOND QUARTER FINANCIAL SUMMARY AND HIGHLIGHTS |
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Selected Financial Summary |
Three Months Ended | |||||||||||||||||||
| ($ in millions, except per share data) |
Jun. 30, |
Mar. 31, |
Dec. 31, |
Sept. 30, |
Jun. 30, |
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| Income Statement | ||||||||||||||||||||
| Net interest income | $ | 2,296 | $ | 2,175 | $ | 2,047 | $ | 2,014 | $ | 2,034 | ||||||||||
| Provision for loan losses | 5,913 | 3,511 | 1,534 | 967 | 372 | |||||||||||||||
| Noninterest income | 561 | 1,569 | 1,365 | 1,379 | 1,758 | |||||||||||||||
| Foreclosed asset expense | 217 | 155 | 133 | 82 | 56 | |||||||||||||||
| Goodwill impairment charge | - | - | 1,775 | - | - | |||||||||||||||
| All other noninterest expense | 2,186 | 1,997 | 2,258 | 2,109 | 2,082 | |||||||||||||||
| Minority interest expense | 75 | 75 | 65 | 53 | 42 | |||||||||||||||
| Income (loss) before income taxes | (5,534 | ) | (1,994 | ) | (2,353 | ) | 182 | 1,240 | ||||||||||||
| Income taxes | (2,206 | ) | (856 | ) | (486 | ) | (4 | ) | 410 | |||||||||||
| Net income (loss) | $ | (3,328 | ) | $ | (1,138 | ) | $ | (1,867 | ) | $ | 186 | $ | 830 | |||||||
| Diluted earnings per common share | $ | (6.58 | ) | $ | (1.40 | ) | $ | (2.19 | ) | $ | 0.20 | $ | 0.92 | |||||||
| Less : effect of conversion feature | (3.24 | ) | - | - | - | - | ||||||||||||||
| Diluted earnings per common share excluding effect of conversion feature |
$ |
(3.34 |
) |
$ |
(1.40 |
) |
$ |
(2.19 |
) |
$ |
0.20 |
$ |
0.92 |
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| Balance Sheet | ||||||||||||||||||||
| Total assets, end of period | $ | 309,731 | $ | 319,668 | $ | 327,913 | $ | 330,110 | $ | 312,219 | ||||||||||
| Average total assets | 314,882 | 319,928 | 325,276 | 320,475 | 316,004 | |||||||||||||||
| Average interest-earning assets | 285,503 | 285,265 | 287,988 | 283,263 | 279,836 | |||||||||||||||
| Average total deposits | 184,610 | 184,304 | 185,636 | 198,649 | 206,765 | |||||||||||||||
| Profitability Ratios | ||||||||||||||||||||
| Return on average common equity | (69.25 | )% | (23.27 | )% | (32.64 | )% | 3.03 | % | 13.74 | % | ||||||||||
| Net interest margin | 3.22 | 3.05 | 2.86 | 2.86 | 2.91 | |||||||||||||||
| Efficiency ratio | 84.11 | 57.49 | 122.13 | 64.55 | 56.38 | |||||||||||||||
| Nonperforming assets/total assets | 3.62 | 2.87 | 2.17 | 1.65 | 1.29 | |||||||||||||||
| Allowance for loan losses/ nonperforming loans |
87.26 |
60.25 |
41.99 |
41.27 |
47.63 |
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| Tangible equity/total tangible assets | 7.79 | 6.40 | 6.67 | 5.60 | 6.07 | |||||||||||||||
- Capital ratios improve. The tangible equity to total tangible assets ratio at June 30 was 7.79 percent compared with 6.40 percent as of Mar. 31, reflecting the April capital raise of $7.2 billion and despite significant provisioning to cover credit costs. Also contributing to the improved capital ratios this quarter was a decrease in total assets of approximately $10 billion, which freed up approximately $550 million in capital. Additional asset reductions are expected as the company continues to prudently manage the size of its balance sheet.
- Net interest margin up 17 basis points to 3.22 percent. The quarter’s increase in net interest income to $2.30 billion was driven by the 17 basis point expansion in the net interest margin. The margin improved as decreases in rates paid on interest bearing liabilities outpaced the decline in asset yields, while generally lower cost retail deposits grew as a percentage of funding. This expansion occurred despite an increase in nonperforming loans from the first quarter.
- Company builds reserves to $8.46 billion. During the second quarter, the company increased the provision for loan losses to $5.91 billion from $3.51 billion in the first quarter. The company expects remaining cumulative losses in its residential mortgage portfolios to be at the upper end of the range of losses it disclosed at the time of its capital raise in April, and for 2008 to be the peak year for provisioning. The increase in provision for loan losses reflected the further decline in house prices which increased expected loss severities, increased delinquencies, reduced availability of credit, and the weakening economy. Total net charge-offs in the loan portfolio rose to $2.17 billion from $1.37 billion in the prior quarter. Nonperforming assets grew to 3.62 percent of total assets at June 30 from 2.87 percent at the end of the first quarter. At the same time, early stage delinquencies for the subprime and home equity portfolios showed early signs of stabilization in the quarter. Approximately one third of the second quarter provision for loan losses related to significant changes in key assumptions the company used to estimate incurred losses in its loan portfolio in response to the increasingly adverse credit trends. Specifically, the company shortened the historical time period used to evaluate default frequencies for its prime mortgage portfolio from a three-year period to a one-year period to reflect the evolving risk profile of the loan portfolio and adjusted its severity assumptions for all single family mortgages to reflect the continuing decline in home prices. Year to date, the company has provided $9.42 billion for loan losses in comparison with net charge-offs of $3.54 billion, increasing the reserve to $8.46 billion at June 30. As a percentage of loans held in portfolio, the reserve stands at 3.53 percent, up from 1.05 percent at the end of 2007. In addition, the company’s coverage ratio of the reserve to nonperforming loans was 87.26 percent, more than double the 41.99 percent at the end of last year.
- Decline in noninterest income reflects further market stress and restructuring of home loans business. Despite the 9 percent quarter over quarter increase in depositor and other retail banking fees, noninterest income of $561 million in the second quarter was down from $1.6 billion in the prior quarter. During the second quarter, the company recognized other than temporary impairment losses of $407 million in the company’s available-for-sale securities portfolio, compared with $67 million in the prior quarter. Net trading losses of $305 million were up from net losses of $216 million in the first quarter primarily due to a reduction in the value of retained interests from credit card securitizations reflecting market conditions. The decrease in revenue from the sales and servicing of home mortgage loans reflects lower volumes in the mortgage origination pipeline due to the company’s exit from wholesale lending and closing of its home loan centers. Also impacting the quarter was a $171 million provision for repurchase reserves, up from a provision of $56 million in the first quarter. Mortgage servicing revenue was down $247 million primarily due to declines in the value of MSR risk management instruments that more than offset the increase in the MSR fair value.
- Company expands expense initiatives targeting $1 billion in savings. Noninterest expense of $2.40 billion in the quarter included $207 million in restructuring and resizing costs related to Home Loans activities as well as other corporate initiatives and foreclosed asset expense of $217 million, up from $155 million in the first quarter. During the quarter, the company implemented a series of additional initiatives designed to significantly reduce expense levels going forward. These initiatives included the previously announced wholesale and home loans center closures and other savings across functions that primarily supported home loans activities that have been discontinued. These actions will result in total annualized cost savings of approximately $1 billion, while incurring restructuring and resizing costs of approximately $450 million, of which $207 million were recorded in the second quarter.
- Net loss per share includes one-time adjustment. The company reported a second quarter diluted net loss per share of $6.58, which included a one-time earnings per share non-cash reduction in the amount of $3.24 per common share. The reduction was recorded as a result of the June conversion of the preferred stock issued in connection with the company’s capital transaction in April. This non-cash adjustment, which had no effect on the company’s capital ratios or the net loss recorded in the second quarter, reduced retained earnings by $3.29 billion, with a corresponding increase to capital surplus-common stock. Excluding this one-time reduction, the company’s second quarter diluted net loss per common share was $3.34.
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SECOND QUARTER SEGMENT RESULTS Retail Banking Group |
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| Selected Segment Information | Three Months Ended | |||||||||||||||||
| ($ in millions, except accounts and households) |
Jun. 30, |
Mar. 31, |
Dec. 31, |
Sept. 30, |
Jun. 30, |
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| Net interest income | $ | 1,210 | $ | 1,203 | $ | 1,262 | $ | 1,306 | $ | 1,291 | ||||||||
| Provision for loan losses | 3,823 | 2,300 | 663 | 318 | 91 | |||||||||||||
| Noninterest income | 842 | 775 | 850 | 833 | 820 | |||||||||||||
| Inter-segment revenue | 7 | 9 | 5 | 9 | 16 | |||||||||||||
| Noninterest expense | 1,232 | 1,221 | 1,212 | 1,149 | 1,131 | |||||||||||||
| Income (loss) before income taxes | (2,996 | ) | (1,534 | ) | 242 | 681 | 905 | |||||||||||
| Income taxes | (959 | ) | (491 | ) | (39 | ) | 225 | 340 | ||||||||||
| Net income (loss) | $ | (2,037 | ) | $ | (1,043 | ) | $ | 281 | $ | 456 | $ | 565 | ||||||
| Average loans | $ | 138,671 | $ | 142,720 | $ | 145,486 | $ | 147,357 | $ | 149,716 | ||||||||
| Average retail deposits | 149,509 | 146,734 | 142,733 | 144,921 | 145,252 | |||||||||||||
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Net change in number of retail checking accounts |
254,957 |
256,069 |
74,493 |
310,360 |
406,243 |
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| Net change in retail households | 94,000 | 154,000 | 37,000 | 161,000 | 228,000 | |||||||||||||
- Revenue growth driven by increase in depositor fee income, expenses held steady. Net interest income was up slightly from the first quarter as the drop in the overall cost of deposits outpaced the decline in variable rate loan yields. Noninterest income, comprised primarily of depositor and other retail banking fees, was up 9 percent quarter over quarter. Depositor fees totaled $767 million in the second quarter, up 9 percent from the seasonally slow first quarter. The company continues to have strong checking account growth adding 254,957 net new accounts in the quarter.
- Quarterly results adversely impacted by higher loan loss provisioning. The quarter’s net loss reflected the increase in the provision for loan losses due in large part to changes in the company’s provisioning assumptions in response to continued declines in housing prices nationwide.
- Average retail deposits up 2 percent. Average retail deposits of $149.51 billion were up $2.78 billion during the quarter reflecting the growth in money market accounts. Retail deposit balances at the end of the quarter were down $3.40 billion to $148.25 billion reflecting the reduction in higher cost promotional certificates of deposit during the quarter. The average cost of retail deposits during the quarter was 2.23 percent, down from 2.65 percent in the prior quarter.
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Card Services Group (managed basis) |
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| Selected Segment Information | Three Months Ended | |||||||||||||||||||
| ($ in millions) |
Jun. 30, |
Mar. 31, |
Dec. 31, |
Sept. 30, |
Jun. 30, |
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| Net interest income | $ | 769 | $ | 765 | $ | 694 | $ | 674 | $ | 649 | ||||||||||
| Provision for loan losses | 911 | 626 | 591 | 611 | 523 | |||||||||||||||
| Noninterest income | 187 | 418 | 315 | 400 | 393 | |||||||||||||||
| Inter-segment expense | 5 | 5 | - | - | - | |||||||||||||||
| Noninterest expense | 297 | 260 | 338 | 364 | 306 | |||||||||||||||
| Income (loss) before income taxes | (257 | ) | 292 | 80 | 99 | 213 | ||||||||||||||
| Income taxes | (82 | ) | 93 | (12 | ) | 33 | 80 | |||||||||||||
| Net income (loss) | $ | (175 | ) | $ | 199 | $ | 92 | $ | 66 | $ | 133 | |||||||||
| Average managed receivables | $ | 26,314 | $ | 26,889 | $ | 26,665 | $ | 25,718 | $ | 24,234 | ||||||||||
| Period end managed receivables | 26,430 | 26,378 | 27,239 | 26,227 | 24,987 | |||||||||||||||
| 30+ day managed delinquency rate | 7.05 | % | 6.89 | % | 6.47 | % | 5.73 | % | 5.11 | % | ||||||||||
| Managed net credit losses | 10.84 | 9.32 | 6.90 | 6.37 | 6.49 | |||||||||||||||
- Revenue down primarily due to higher credit costs and valuation adjustments. Net interest income was flat with the prior quarter as lower funding costs were offset by a lower balance of average receivables and declines in interest rates charged on card receivables. Noninterest income was down from the prior quarter reflecting reduced value of retained interests due to market conditions. In addition, noninterest income during the first quarter included an $85 million benefit received from the company’s share of VISA’s IPO. Noninterest expense was flat with the prior quarter, excluding the $38 million partial recovery of VISA litigation expense recorded in that quarter.
- Provision up but delinquencies stabilizing. The increase in the provision to $911 million from $626 million reflected higher managed net credit losses and an increase in reported receivables as maturing securitizations resulted in on-balance sheet funding of new originations. Managed net credit losses of 10.84 percent reflected the increase in contractual and bankruptcy losses in the face of a weaker economy. Reflecting the previous actions taken to reduce the company’s loss exposure, the 30+ day managed delinquency rate of 7.05 percent was up slightly from the prior quarter.
- Total managed receivables flat with prior quarter. Total managed receivables at quarter end remained level at $26.43 billion. During the quarter, Card Services opened 755,301 new credit card accounts, up from 666,407 in the prior quarter. Approximately 35 percent of the new accounts came through the retail channel as the company continued to leverage its retail network.
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Commercial Group |
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| Selected Segment Information | Three Months Ended | |||||||||||||||||
| ($ in millions) |
Jun. 30, |
Mar. 31, |
Dec. 31, |
Sept. 30, |
Jun. 30, |
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| Net interest income | $ | 203 | $ | 196 | $ | 200 | $ | 200 | $ | 208 | ||||||||
| Provision for loan losses | 17 | 29 | 19 | 12 | 2 | |||||||||||||
| Noninterest income | 5 | (8 | ) | (10 | ) | (34 | ) | 63 | ||||||||||
| Noninterest expense | 63 | |||||||||||||||||