Nationwide housing skid sends WaMu's profit sliding

Seattle-based Washington Mutual blamed a 9 percent drop in its third-quarter profit Wednesday on a slowdown in its mortgage business.

The drop was more severe than Wall Street analysts had expected, and shares of WaMu stock fell $1.70, or 3.89 percent, to $42.01 in after-hours trading.

The nation's largest savings and loan said profit also fell because of one-time charges, including expenses from cost-cutting measures.

WaMu has eliminated nearly 10,000 jobs in the past year as it tries to become more profitable.

"The housing market is clearly weakening, with the pace of housing price appreciation slowing in most regions of the country," Chief Executive Kerry Killinger told analysts and investors in a Wednesday conference call, held after the close of regular trading.

"We are also experiencing somewhat higher delinquencies and loan losses," he said.

WaMu reported a profit of $748 million, or 77 cents a share, for the July-through-September period. That was down from $821 million, or 92 cents a share, a year ago, marking the second consecutive quarter in which WaMu has failed to report a profit increase.

Analysts had been expecting a profit of 93 cents a share, according to a poll by Thomson Financial.

"Patience is running out," said Fred Cannon, an analyst at Keefe, Bruyette & Woods. "2007 is really going to be a watershed for the company."

Killinger said 2006 was meant to be a transition year, with the stage set for improved results in 2007.

WaMu has been eliminating jobs and moving work to less-expensive locations within the United States to offset the slowdown in its mortgage business.

Additionally, it has placed more emphasis on consumer and small-business banking — both bright spots during the third quarter, Killinger said.

"It's going to take awhile for some of the excess house-price appreciation to get back to equilibrium," he said in an interview. "What's key for us is growing our other businesses."

The results included a $31 million charge from a previously announced sale of mortgage-servicing rights to Wells Fargo, which is expected to lower WaMu's exposure to market fluctuations; as well as a $33 million charge from its "ongoing efficiency initiatives."

WaMu faces more competition for home loans, even as demand has dropped.

At the same time, a rise in short-term interest rates means the company is making less money on loans and paying out more for deposits.

Killinger said he expects the company's net interest margin, down to 2.53 percent in the third quarter from 2.65 percent in the second quarter, to improve if the Federal Reserve holds the line on rates.

Also, WaMu said its board of directors approved a cash dividend of 53 cents a share for its common stock, up a penny a share from the previous quarter's dividend.

Amy Martinez: 206-464-2923 or amartinez@seattletimes.com