For the quarter, WaMu's net income rose to $1 billion, from $865 million a year ago. However, this year's quarter included a $415 million gain from the sale of the mutual fund division to Principal Financial Group
However, the subprime mortgage division dragged down results once again, with a loss of $160 million for the quarter, because of a $110 million reduction in gains on sale and a $50 million decrease in the estimated value of WaMu's subprime residual loans. WaMu's home loan segment as a whole lost $122 million for the quarter, versus net income of $57 million in the prior-year period. That means the subprime segment accounted for more than 100% of the division's losses. In fact, subprime's woes resulted in a billion-dollar swing -- for the year, the home loan segment lost $48 million, while in 2005, it made $1 billion in net income.A year to forget
WaMu's management and shareholders likely won't look back on 2006 with nostalgia. Over the past year, WaMu's stock was slightly down, while the indexes all scored double-digit gains. However, 2007 should be a better year. In 2006, WaMu sold its mutual fund division, repositioning the balance sheet by letting its option adjustable-rate mortgages (ARM) portfolio run off to the tune of $3.5 billion for the quarter. WaMu also decreased its subprime holdings by $2.4 billion, and significantly decreased its subprime originations. In the process, WaMu cut subprime staffing 27%, which cut non-interest expenses 21%. As a result, WaMu's ranking in subprime production fell four spots to No. 10.
These moves should help reposition WaMu for 2007 by trimming fixed costs and repositioning the balance sheet. WaMu hopes to improve its skimpy 2.58% net interest margin (the margin it earns on its earning assets) to 2.85%-2.95% in 2007. Although it's not a perfect apples-to-apples comparison, WaMu trails behind Wells Fargo's
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Fool contributor Emil Lee is an analyst and a disciple of value investing. He doesn't own shares in any of the companies mentioned above. Emil appreciates comments, concerns, and complaints. The Motley Fool has a disclosure policy.