WaMu Could Get Wobbly 1. The Top Rocket Stocks for This Week 2. You Ask, Cramer Answers 3. Mortgage Mess Mauls Capital One 4. Fund Managers Covet These Cheap Stocks 5. If FOMC Cuts Fed Funds Rate, Buy Regional Banks Charles Schwab Fisher Investments Fidelity Investments E*TRADE FINANCIAL Options House TD AMERITRADE At Washington Mutual, as at the other institutions, credit quality is in decline, and reserves appear somewhat skimpy. Given those trends, in a worsening economic environment liquidity -- as well as the bank's dividend -- could come under pressure. The bank reported nonperforming assets comprising 1.40% of total assets as of June 30, double the level from a year ago. The thrift's net income rose 9% from a year ago in the second quarter, but its ratio of reserves to nonperforming loans dropped to 43.4% -- its lowest level in more than five years. Meanwhile, Washington Mutual's ratio of nonperforming assets to core capital and loan-loss reserves was 19.17% -- a very high level for a large bank. Most banks and thrifts we surveyed showed a number well below 10%. If we assume that when disposing of a repossessed home a bank is likely to recover 70% of the remaining loan balance, the institution would still be comfortably well-capitalized, with a risk- based capital ratio of 11.76% (it needs to be 10% to be considered well-capitalized). OK so far, but what if a significant portion of the loans past due only 30-90 days are eventually foreclosed? Loans past due 30-89 days totaled $2.9 billion. Addressing the expectation of a continued decline in credit quality, CFO Thomas Casey revised the holding company's guidance for reserves for the second half, saying the company would set aside $900 million to $1.1 billion for reserves during the second half of 2007. This will have a major impact on earnings. If banking industry conditions deteriorate, Washington Mutual's divdend could come under pressure. The company paid out 60% of its second- quarter earnings to shareholders. This payout ratio is high, considering that the thrift is under under-reserved -- so it is conceivable that the dividend may have to be reduced in coming quarters, if asset quality continues its dramatic decline. Liquidity is also a major concern. A high percentage of Washington Mutual's deposits are in non-retirement accounts with balances exceeding $100,000. We call these large, partially insured deposits "hot money." Washington Mutual's hot- money ratio was 37.6% as of June 30. As we saw last week with Countrywide Bank, these deposits can fly quickly in a time of uncertainty.