updated 10/17/2007 6:26:29 PM ET 2007-10-17T22:26:29

Washington Mutual Inc.'s third-quarter profit shrank 72 percent as sagging home prices made it harder for borrowers to pay their bills and hurt the value of the bank's portfolio of mortgage loans.

The third-biggest home lender on Wednesday reported quarterly profit of $210 million, or 23 cents per share, compared with profit of $748 million, or 77 cents per share, a year earlier.

Analysts polled by Thomson Financial forecast a profit of 27 cents per share.

Chief Executive Kerry Killinger said "increasingly difficult market conditions" are hamstringing the banking industry.

Total quarterly revenue, a combination of net interest income and noninterest income, fell to $3.39 billion from $3.52 billion last year. Analysts expected revenue of $3.53 billion.

The bank recently warned that the weak housing market could drag down its profits by about 75 percent.

Washington Mutual shares dropped 13 cents, or about 0.4 percent, to $33.07 before the earnings were reported on Wednesday. The stock lost another 7 cents in after-hours trading.

Washington Mutual last year socked away $967 million to prepare for borrowers defaulting on their debt, mostly mortgages and credit card loans. The reserve is six times bigger than the provision in the third quarter of last year.

Washington Mutual's profit margin from lending shrank slightly versus the second quarter as the bank needed to borrow money from other banks, which is more expensive than raising cash through deposits.

Net interest income, or profit from lending, rose 3.4 percent to $2.01 billion. Noninterest income, or earnings from charges and fees, slipped 12 percent to $1.38 billion.

Killinger said he was disappointed with the overall results, but said the company's retail banking, card services and commercial businesses performed well.

"We continued to adapt our home loans business to meet market conditions" in the quarter, Killinger added.

Copyright 2007 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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