Check out the first quarter 2007 Washington Mutual Financial Statement. Some of the accounting appears to be from the March 2000 dotcom playbook as we shall soon see.

Washington Mutual, Inc. reported first quarter 2007 net income of $784 million, or $0.86 per diluted share, compared with net income of $985 million, or $0.98 per diluted share, in the first quarter of 2006, a period that included an $85 million after tax partial settlement related to Home Savings goodwill litigation.

Financial Summary

Nonperforming Assets Soar

Nonperforming assets went from .59% in the quarter ending March 2006 to .80% in December 2006 to 1.02% in March 2007. Meanwhile the provision for loan losses decreased from $344 million in December 2006 to $234 million in March 2007.

The above chart looks smoother than it really is because 2001-2005 is in years while 2006 on is in quarters. Let’s see if we can fix that.

Asset Growth Shrinks

Card Services Credit Losses Rise

Net credit losses on card services jumped from 5.84% in the 4th Quarter of 2006 to 6.31% in the 1st quarter of of 2007 while the provision for loan losses dropped by $100 million.

Negative Amortization Earnings Soar

Wa-Mu Statement Summary

  • Nonperforming assets as a percentage of total assets was 1.02 percent at the end of the first quarter up from 80 basis points at year end
  • Net charge-offs for the quarter of $183 million were up $47 million from the fourth quarter
  • Non-card provision for loan losses was $128 million up from $69 million in the prior quarter
  • The further softening of the housing market and rising NPAs in the first quarter caused Wa-Mu to conclude that guidance for credit provisioning should be increased
  • Net credit losses on card services jumped to 6.31% in the 1st quarter of 2007 from 5.84% in the 4th Quarter of 2006
  • Capitalized interest recognized in earnings that resulted from negative amortization within the Option ARM portfolio totaled $361 million, $333 million and $194 million for the three months ended March 31, 2007, December 31, 2006 and March 31, 2006.

So…… Wa-Mu “expects both NPAs and charge-offs to increase” and right in the face of rising credit card losses boosted earnings by lowering loan loss provisions by $110 million. In addition, a rise in negative amortizations added $361 million in questionable profit to their earnings. The former amounts to approximately 12 cents per share and the latter approximately 40 cents per share. In other words, 52 cents out of the reported 86 cents is quite suspect.

Managed Earnings

Q: Why might Wa-Mu have wanted to pull this stunt?
A: They needed every bit of it to beat analysts’ expectations by 2 cents.

Mike Shedlock / Mish/