THE BASIS POINT

Earnings Roundup: Banking and Mortgage Industry

Bank Earnings
Banks have virtually doubled 3Q earnings by injecting $8.1 billion into net income from funds they had set aside to cover loan losses. The 18 commercial banks with at least $50 billion in assets earned an adjusted $17 billion in the third quarter – almost half of which came from reducing their loan-loss reserves and bringing their profits up. Of course, when the banks set aside money for losses, they booked the losses. Optimistic analysts say that the reductions in loan-loss reserves illustrate how banks’ economic forecasts have improved in recent months; pessimists say that the foreclosure mess and buyback lawsuits will be with us for years to come.

  • >> The Federal Home Loan Bank of Seattle reported third-quarter income of about $10 million after losing $144.3 million a year earlier and another $93.8 million in the second quarter. It said lower credit-related charges recorded on private-label mortgage-backed securities helped boost third-quarter earnings. But they are still losses, and the Federal Housing Finance Agency, its conservator, still deems the bank undercapitalized.
  • >> Fifth Third Bancorp earned $238 million in the third quarter after releasing $500 million from its loan-loss reserves. KeyCorp earned $219 million after releasing $263 million from reserves. CitiGroup saw 92% of its earnings come from released reserves, Capital One 82%, Huntington Bancshares 65%. Others’ losses would have been much worse. Marshall & Illsley lost $144 million in the quarter, but released $128 million. Zions Bancorp in Salt Lake City lost $47 million and released $51 million. SunTrust earned $153 million after releasing $75 million from its reserves. MetLife, mostly an insurance company but also making waves in mortgage banking, earned $286 million in the third quarter, mostly from improved investment income and strong U.S. annuity sales.
  • >> Reuters reported that Flagstar Bancorp said it priced a common stock offering at $1 a share, a 57 percent discount, wiping out half of the company’s market value and causing the stock to drop 47% yesterday. Flagstar received $267 million in bailout funds. “Proceeds from the offerings, expected to be about $367.3 million, would be used for general corporate purposes including potential dispositions of non-performing assets, or potential restructuring of the balance sheet. Earlier this year, Flagstar saw investment from Greenlight Capital, a hedge fund run by investor David Einhorn, which bought 33 million shares in the bank.”
  • >> Blackstone reported a 23% rise in third-quarter profits to $339 million, helped by gains in its real estate portfolio, the value of its private equity portfolio and a strong performance by its GSO credit-investing arm. “Blackstone is looking to take advantage of changes in US law that would limit banks from trading with their own capital.”

Mortgage Insurance Company Earnings
PMI, the 3rd largest MI company, posted its 13th quarterly loss. The news pushed the stock prices of all the MI companies down. MGIC and Radian (#1 & #2) saw their stocks drop, although for all of 2010 MI company stocks have done very well. PMI said that uncertainty about the foreclosure process faced by many U.S. banks must be eliminated for it to return to a profit. PMI’s CFO stated that PMI would not be responsible for paying interest expenses incurred during the moratorium period if the delay is self- imposed by the lender.

Genworth Financial, based in Virginia and another insurance company with a mortgage presence, made $83 million last quarter. But that was lower than expected, and its stock price dropped 10%. Operating losses at the U.S. mortgage-insurance unit widened to $152 million from $116 million a year earlier as the insurer set aside more reserves. In general, mortgage insurers, which pay lenders when homeowners default and foreclosures fail to recoup costs, have lost money over the past three years.