Point of View: WaMu Rebalances Home Loan Portfolio.(Washington Mutual - Kerry Killinger)

This viewpoint is an excerpt from Washington Mutual chairman and CEO Kerry Killinger's remarks to investors following the company's release of third quarter earnings.

Our earnings included net after-tax charges of $31 million, or $0.03 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.

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. Nevertheless, when taken together, we continue to expect that these actions will be accretive to earnings in 2007.

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.

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 ...