April 17 (Bloomberg) -- Washington Mutual Inc., the largest U.S. thrift, said first-quarter profit dropped 20 percent as home-lending losses that began last year spilled into 2007.

Net income fell to $784 million, or 86 cents a share, from $985 million, or 98 cents, a year earlier, the Seattle-based company said today in a statement. The average estimate of 16 analysts surveyed by Bloomberg was 84 cents.

Chief Executive Officer Kerry Killinger said the bank was experiencing ``unprecedented deterioration in the subprime mortgage business,'' according to remarks prepared for a conference call later today. The bank reported a $113 million loss from the home loan group, mostly from subprime lending.

Washington Mutual ``has had difficulty executing in the mortgage business and it isn't getting any easier,'' wrote a team of analysts lead by Robert Napoli at Piper Jaffray & Co. in an April 13 research note. They predicted mortgages will lose more money in the first half and rated the stock ``market perform.''

In an interview, Killinger said the bank has upgraded underwriting standards on subprime loans, and that's already produced better results in 2007.

``I'm seeing improved credit performance off the originations this year,'' he said.

Subprime Losses

Subprime home loans caused a $164 million loss within the home loan group, the bank said. Washington Mutual lost money selling subprime loans, Killinger said in his prepared remarks, which were posted on the bank's Web site, and the value of loans held for sale also declined.

Subprime mortgages are made to people with weak or limited credit histories, or heavy debts. They're among the most likely to default, and at least 50 mortgage companies have halted operations or sought buyers since the start of 2006, according to Bloomberg data.

Nonperforming assets, those that are no longer paying interest, nearly doubled to $3.26 billion, or 1.02 percent of total assets, from a year earlier.

The net interest margin, the difference between what the bank pays on deposits and what it charges for loans, expanded to 2.79 percent from 2.58 percent in the fourth quarter. The margin was 2.75 percent in the year-earlier period.

Profit in the bank's card services unit advanced 24 percent to $256 million, while the retail bank's net income rose 2.2 percent to $569 million.

The bank increased the quarterly dividend for the 47th consecutive quarter to 55 cents a share from 54 cents. Shareholders as of April 30 will be paid May 15.

Washington Mutual's stock fell 60 cents, or 1.5 percent, to $40.13 as of 4 p.m. today in New York Stock Exchange composite trading. The earnings were released after official hours. In late trading, the shares rose to $41.30 as of 5:35 p.m.

The stock dropped 11.2 percent during the first quarter, making it the worst performer in the 24-member KBW Bank Index, which lost 3.1 percent.

To contact the reporter on this story: Elizabeth Hester in New York at ehester@bloomberg.net.

Last Updated: April 17, 2007 18:38 EDT