NEW YORK (AP) - Washington Mutual Inc. said Tuesday it lost a staggering $3 billion during the second quarter as the nation's largest savings and loan increased its loss reserves to more than $8 billion to cover souring loans in its mortgage portfolio.

The Seattle-based bank also said it would be cutting up to $1 billion in expenses by the end of 2009.

For the April to June period, WaMu reported a loss of $3.33 billion, or $6.58 per share, compared with a profit of $830 million, or 92 cents per share, in the year-ago period.

Results include a previously disclosed, one-time reduction of $3.24 per share related to the company's $7.2 billion capital raise in April. Excluding the reduction, the loss per share was $3.34.

Analysts polled by Thomson Financial, on average, expected a loss of $1.05 per share. Analyst estimates typically exclude one-time, unusual charges.

WaMu's total loan-loss reserves increased by $3.74 billion to $8.46 billion, as it set aside a total of $5.91 billion during the quarter to cover bad loans. The increase in loan-loss provision reflects falling home prices, increased delinquencies, reduced availability of credit and the weakening economy, the bank said.

Total net charge offs, or loans written off as unpaid, increased to $2.17 billion, while nonperforming assets grew to 3.62 percent of total assets as of June 30, from 2.87 percent at the end of the first quarter.

The company now expects cumulative losses in its residential mortgage portfolio to total $19 billion, the high end of previous guidance, and said 2008 will be the peak year for provisioning.

In response to worsening credit trends, WaMu shortened the time used to evaluate default frequencies in its prime mortgage portfolio to a one-year period from a three-year period, which is reflected in the increased provision.

WaMu said the fastest rising delinquencies were among its "option" adjustable rate mortgage loans. The bank stopped originating the negative amortizing loans, also called option ARM loans, in June. Option ARM loans offer very low introductory payments and let borrowers defer some interest payments until later years.

Early stage delinquencies for the subprime and home equity portfolios, however, showed signs of stabilization, the bank said.

Net interest income, or income generated from loans and deposits, rose 13 percent to $2.3 billion from $2.03 billion. Noninterest income, or income generated from fees and other charges, dropped 68 percent to $561 million from $1.76 billion in the same quarter last year, due in part to the company's exit from wholesale lending and the closing of its home loan centers.

During the quarter, WaMu announced plans to exit the wholesale lending business and close all remaining standalone home loan centers, resulting in 3,000 job losses. The bank said it would instead focus its mortgage-originating efforts in its retail bank branches and Web site, and by expanding its call center operations. WaMu announced an additional 1,200 job cuts in June.

The bank also announced earlier this year it was slashing its quarterly dividend to 1 cent from 15 cents, which will result in savings of about $490 million a year.

In total, WaMu expects these and other cost-cutting initiatives to result in annualized cost savings of $1 billion by the end of 2009. The company will record total restructuring costs of about $450 million, $207 million of which was recorded in the second quarter.

Steve Rotella, president and chief operating officer, said some of the cost-cutting actions initiated during the quarter will play out over the course of the year and into 2009. Rotella said WaMu continues to evaluate ways to increase productivity, but he would not comment on whether that includes additional jobs cuts.

WaMu ended the quarter with more than $40 billion of readily available liquidity, and its capital ratio increased to 7.79 percent, up from 6.40 percent in the first quarter.

As a result, WaMu said it has sufficient capital to ride out the remainder of the credit crunch and does not anticipate raising additional capital going forward.

WaMu became one of the first retail banks to seek outside cash in the wake of the credit crisis when it agreed to sell equity securities to an investment fund managed by TPG Capital and to other investors this spring, raising $7.2 billion in fresh capital.

"We think they are taking the right action in strengthening operations and reducing costs and supporting the franchise," said Owen Blicksilver, a spokesman for TPG. "The losses they reported today were in line with what TPG expected when it did its underwriting for the investment."

Late Tuesday, Moody's Investors Service put WaMu's senior unsecured rating of "Baa3" on review for possible downgrade. A rating of "Baa3" is one notch above junk status.

"Though liquidity remains sufficient, WaMu experienced some declines in its commercial and brokered institutional deposit balances in the second quarter of 2008," Moody's said. "This reduced financial flexibility makes it more difficult for the company to successfully navigate through unanticipated events."

Stephanie Hall, senior analyst at Gradient Analytics, viewed the reserve build-up as a positive.

"The firm has been extremely slow in provisioning for loan losses," she said, adding that she expects the WaMu to report additional provisions in the third and fourth quarters, but likely smaller than those in the first half.

WaMu shares surged in afternoon trading ahead of the earnings report, rising 34 cents, or 6.2 percent, to close at $5.82. Its shares fell in aftermarket trading, shedding 24 cents, or 4 percent, to $5.58. They are down about 57 percent for the year.