Banks, Thrifts Raise Credit Loss Reserves

Banks and thrifts took a beating in the third quarter but thrifts experienced an 80% drop in earnings despite maintaining a high level of originations. Higher loss reserves contributed to the earnings decline for both banks and thrifts.

Thrifts originated $165.1 billion in one-to-four family mortgages, down only 5% from the second quarter. Refinancings accounted for 44% of loan production.

However, thrifts reported only $704.1 million in earnings for the third quarter, according to the Office of Thrift Supervision, down from $3.8 billion in the second quarter, as charge-offs took a heavy toll.

OTS officials blamed the 82% drop in earnings mainly on secondary market conditions that forced 10 thrifts to recognize losses on their mortgage pipelines and loan sales. They stressed that portfolio lenders did fairly well in the third quarter.

Single-family loan originations by commercial banks and savings banks plummeted 50% in the third quarter, but their earnings fell by only 22% to $28.7 billion.

Despite the market turmoil, banks and thrifts continued to sell a large amount of mortgages in the secondary market.

Federally chartered thrifts raised their loan loss reserves to 0.92% from 0.38% in the second quarter and their charge-offs on single-family loans jumped to $569.5 million from $312.6 million the second quarter. OTS officials expect charge-offs to increase in coming quarters.

"Despite a difficult environment, I am encouraged that the managers of OTS-regulated institutions are taking the appropriate steps to provide a cushion for the future," OTS director John Reich said. "Strong capital and higher loan loss allowances will serve thrifts well if the housing markets weaken further."

Total charge-offs on residential mortgages by banks and thrifts were $676 million -- so thrift institutions really took the brunt of the pain in the third quarter. The charge-off rate for one-to-fours was 1.65% in the third quarter.

The FDIC also reported that insured institutions increased their loan loss provisions to $16.6 billion, up from $7.5 billion in the third quarter of 2006.

FDIC chairman Sheila Bair said insured financial institutions entered the third quarter with strong earnings and capital and they are in a good position to absorb the current stresses.

"Going forward, the outlook for the industry depends on the severity of the housing market downturn and the extent to which it spills over into the broader economy," she said.

Thrift Loss Reserves Rise

Category 3Q '07 2Q '07

Loss Reserve 0.92% 0.38%

Single-Family Charge-Offs $569.5MM $312.6MM

Source: Office of Thrift Supervision

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