Continued Housing Market Distress Causes Record Fourth Quarter Loss
Source:
Office of Thrift Supervision
Washington, D.C.
www.ots.treas.gov
The thrift industry posted a record loss of $5.24 billion for the fourth quarter of 2007, as institutions responded to a downturn in the housing market by taking write-downs, recording restructuring costs and setting aside record levels of provisions for anticipated loan losses, the Office of Thrift Supervision (OTS) reported on February 20.
“These are difficult economic times, and I expect our thrifts to continue to bolster reserves appropriately for the loan losses anticipated in 2008,” said OTS Director John Reich.
“The provisions in the third and fourth quarters of 2007 will position our thrifts for these events,” he said. “The bottom line, as performance this quarter shows, is that the economic distress in the mortgage market is an earnings issue and not a capital issue for our industry.”
About $4 billion of the overall loss resulted from a write-down by a few thrifts in goodwill, necessary to recognize the reduced value of acquired assets. Another $2.2 billion loss was due to a restructuring charge by a single institution. Income offset those losses in part.
Other highlights from the news release include:
• During the fourth quarter of 2007, thrifts set aside $5.1 billion in loan loss provisions, or 1.35% of average assets. That’s up from 0.92% ($3.5 billion) in the previous quarter and 0.45% ($1.6 billion) in the fourth quarter one year ago. For the year, loan loss provisions totaled $11.3 billion, or 0.75% of average assets, compared with $3.8 billion in 2006, or 0.25% of average assets.
• Equity capital at the end of 2007 was 9.46% of assets, down from 10.72% one year ago and 10.16% in the third quarter of 2007. At the end of the year, 99% of the industry exceeded well-capitalized standards.
• Net income was $2.87 billion for the year, down from $15.85 billion in 2006. In the fourth quarter of 2007, the net loss of $5.24 billion was down from net income of $657 million in the third quarter and net income of $3.14 billion in the fourth quarter a year ago.
• Profitability, as measured by return on average assets (ROA), was 0.19% for the year, down from 1.06% in 2006. In the fourth quarter of 2007, ROA was a negative 1.38%, down from 0.17 percent in the third quarter and 0.89% in the fourth quarter a year ago.
Troubled assets (noncurrent loans and repossessed assets) were 1.65% of assets, up from 1.19% in the third quarter and 0.70% a year ago.
OTS, an office of the Department of the Treasury, supervised 826 thrifts at the end of the fourth quarter. Industry assets were $1.51 trillion, an increase of seven percent for the year. OTS also supervised 475 holding company enterprises with approximately $8.5 trillion in U.S. domiciled consolidated assets.
OTS Director Reich on March 4 told the Senate Banking Committee that the “mortgage market crisis has created serious challenges and caused an earnings issue — but not a capital issue —for the nation’s thrift industry.”
“I believe that’s an important distinction,” Reich told committee members. “Capital and loan loss reserves provide the foundation of support for financial institutions during times of challenge, and thrift institutions continue to maintain strong capital and continue to set aside significant loan loss reserves.”
During his testimony, the director also highlighted an OTS proposal to prevent foreclosures among financially-stressed homeowners who owe more on their homes than their homes are worth.
More details about the thrift industry earnings and Reich’s full testimony are available on the OTS website.
