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Loss-Reserve Estimates Are Worst-Case Scenario

January 20, 1991

I want to clarify information in the article, "More Banks, S&Ls Expected to Boost Loss Reserves" (Dec. 11), that was confusing and caused great concern to us and others who read it.

Quotes and estimates attributed to Montgomery Securities gave potential events a degree of certainty, which was not our intention or belief. Three points need to be clarified to avoid unfair damage to the nation's depository institutions:

* Our loss-reserve estimates are just that, worst-case estimates, based on our own analysis of appropriate general reserve levels. These "general" reserves are included in regulatory capital and are set aside against potential problems on currently performing assets. General reserves are not specific reserves against problem loans nor are they writeoffs.

* The potential reserve action may be initiated by the S&Ls themselves or encouraged by regulators concerned about general real estate and economic conditions.

* It is only our projection that normal quarterly additions to these general loss reserves may be accelerated and taken all at once in the 1990 fourth quarter. Companies may well build them up over time or not take them at all. However, if reserves are boosted, our 1991 earnings projections will likewise be increased to account for the accelerated process.

JAMES F. WILSON

The writer is a research analyst in San Francisco.

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