Is WaMu the Next Countrywide?

The problem with relying on the thrift to fund new lending is that Countrywide does not have a strong track record of gathering retail deposits. That's why last week's announcement -- along with Countrywide's decision to tap an $11 billion bank line -- led to a mini-run on deposits last Friday. There were reports of large depositors moving their uninsured deposits to other banks.

Most of Countrywide Bank's deposits are in nonretirement accounts with balances exceeding $100,000. Countrywide's hot-money ratio was a whopping 89.1% as of June 30. With the majority of these balances uninsured, continued deposit outflow seems likely.

If that funding problem isn't enough, the institution's wholesale borrowings are maxed out. Countrywide had $28.8 billion in Federal Home Loan Bank advances as of June 30, or 31% of its total liabilities. It's hard to imagine the institution's wholesale borrowings increasing much from here.

Considering the problems selling loans in the secondary market, along with all of its funding concerns, it would seem that Countrywide's bread-and-butter mortgage lending activity will be scaled back for some time.

As far as asset quality is concerned, Countrywide has followed the pattern of other large mortgage lenders, with nonperforming assets at 1.0% of total assets, increasing from 0.27% in June 2006. Loans past due 30-89 days totaled $1.7 billion, potentially doubling the institution's level of problem loans.

Wachovia's Wide World

World Savings Bank is held by Wachovia (WB Quote), which acquired the bank in October 2006. Unlike the other three institutions highlighted here, the holding company has deep pockets and a varied revenue stream.

As of June 30, World Savings reported that nonperforming assets were 0.84%, up from 0.37% a year earlier. The institution's ratio of loan-loss reserves to nonperforming loans was 24.11%, the lowest level of coverage for any of the largest 20 banks and thrifts.

However, the institution's low level of reserves does not tell the whole story. World Savings is known for conservative underwriting. Most of its mortgage portfolio consists of adjustable-rate mortgages, and it does not sell any mortgage loans.

Mortgage loan approvals are mainly based on the value of the collateral, and the average loan-to-value ratio for its mortgages is around 70%. This means that when it charges off nonperforming loans, it recovers nearly all of its losses. The institution's ratio of net charge-offs to average assets has been below 0.01% for over six years.

As always, it remains to be seen just how bad the asset quality problems will get. World Savings reported loans past due 30-89 days of $2.3 billion as of June 30. This is more than double the nonperforming loans, so even this conservative lender may experience a darkening scenario for earnings in the quarters ahead.