It’s like night and day: Washington Mutual Inc.’s home loans unit generated $1.03 billion in profit in 2005, and lost $48 million in 2006, the bank said in reporting fourth-quarter earnings. But solid performance in retail and commercial banking and credit card services helped WaMu boost profits from 2005.

At $1.06 billion, or $1.10 per share, profits for the fourth quarter of 2006 were up 22.5 percent from the year before, when WaMu posted net income of $865 million, or 85 cents per share. Profits for the year totaled $3.56 billion, or $3.64 per share, up 4 percent from 2005 net income of $3.43 billion, or $3.73 per share.

That’s thanks in part to a $415 million gain from the sale of WM Advisors Inc., WaMu’s mutual fund asset-management company, and solid performance in retail banking, credit card services and commercial business banking, the company said.

WaMu focused on expanding its consumer and small business banking business in 2006, while simultaneously cutting costs by shedding workers. The company eliminated more than 10,000 positions in 2006, or 18 percent of its workforce, and moved 4,000 jobs overseas.

“For the full year, we successfully reduced our cost structure and repositioned the balance sheet while continuing to expand our consumer and small business banking franchise,” said Chief Executive Officer Kerry Killinger in a prepared statement. “In 2006, we opened a record 1.23 million net new checking accounts, added a record 848,000 net new retail households and experienced strong cross-sales of the WaMu credit card to our retail banking customers.”

Killinger said the reversal of fortunes in the Home Loans Group — which posted losses of $122 million in the fourth quarter and was $24 million in the red in the third quarter — was expected.

“For the past two years, I’ve been saying that an overinflated housing market was vulnerable to a correction,” Killinger said. In 2006, he said WaMu “took a series of defensive actions … including the sale of subprime residuals, selling a substantial majority of our originations and generally tightening our underwriting criteria.”

Overcapacity and weak market conditions are causing many subprime mortgage lenders to declare bankruptcy or exit the business, Killinger said.

“In 2006, we sold nearly all of our subprime mortgage production, which helped reduce our subprime outstandings by $2.4 billion from the end of last year,” he said. “We also significantly reduced production, and as a result, saw our market share position decline from number six last year to number 10 in 2006.”

Fourth-quarter loan production in the Home Loans Group totaled $34.9 billion, compared with $48.7 billion in the same quarter of 2005. At $158.4 billion, loan volume for the year was down 22 percent from the $202.7 billion posted in 2005.

Like other lenders, WaMu has seen increased delinquencies on subprime mortgage loans, Killinger said. More delinquencies and weakening subprime mortgage market conditions hurt fourth-quarter earnings by $160 million, the company reported. That included a reduction in fourth-quarter gain on sale of approximately $110 million and a reduction of about $50 million in the value of subprime residuals, which ended the year with a balance of $168 million.

Credit quality is down and the provision for loan losses is up, in part because of higher delinquencies in mortgage loans, said Chief Financial Officer Tom Casey.

Companywide, the percentage of nonperforming assets was 80 basis points, up from 69 basis points at the end of the third quarter and 57 basis points at the end of 2005, ” due to a higher level of delinquencies in our single-family residential real estate portfolios,” Casey said. WaMu’s goal is to limit nonperforming assets to less than 1 percent of all assets.

Companywide, the $344 million provision for loan and lease losses for the fourth quarter was up from $166 million in the prior quarter, with $95 million of the total attributed due to “substantial growth” of credit card loans.

Casey said WaMu would boost provisions for loan losses to between $1 billion and $1.1 billion for 2007, up from $816 million in 2006 and $316 million in 2005.

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