Earnings, Ratings Continue to Suffer

The Federal Deposit Insurance Corp. recently announced it processed 25 orders in August of administrative enforcement actions taken against banks and individuals. These included seven cease-and-desist orders, eight removal and prohibition orders, eight civil money penalties, and two terminations of cease-and-desist orders. Those receiving cease-and-desist orders were Mission Bank in Kingman, Ariz.; American Metro Bank in Chicago, Ill.; First Independent Bank of Russell, Minn.; First BankAmerican in Elizabeth, N.J.; First American International Bank in Brooklyn, N.Y.; Twin City Bank in Longview, Wash.; and 1st Security Bank of Washington.

Kevin D. Race and Patrick S. Flood, officers of bankrupt HomeBanc Corp., are being sued by Vianale & Vianale LLP on behalf of buyers of HomBanc securities between Sept. 26, 2005, and Aug. 3, 2007. The class action alleges the officers misled investors by misrepresenting the company’s risk of loss and financial condition, according to an announcement by Vianale, which noted HomeBanc failed to adequately disclose it was “planning to sell its adjustable rate loans for cash, and was buying lower-quality, higher-risk, residential mortgage-backed securities.”

The Bear Stearns Companies Inc. reported today a net loss of $854 million in its fiscal fourth quarter ended Nov. 30. The loss, down from a profit of $171 million in the prior quarter and $563 a year earlier, was driven by a $1.9 billion write-down net of hedges in its fixed income unit.

“The continued re-pricing of credit risk and the severe dislocation in the structured products market led to illiquidity in the fixed income markets, lower levels of client activity across the fixed income sector and a significant revaluation of mortgage inventory,” Bear said in the earnings report.

Synovus Financial Corp. said Monday it expects full-year earnings to come in below the previously issued guidance of $1.83 per share because of higher-than-anticipated loan loss provision expenses resulting from the continued deterioration in the housing sector, particularly in its Atlanta and west Florida housing portfolio. A “higher level of negative credit migration within our risk grades, a higher level of charge-offs than previously indicated and continued growth of non-performing assets,” are likely to approximate the Georgia-based company’s fourth quarter loan loss provision to the third quarter’s level of about $58.8 million.

Fifth Third Bancorp disclosed Tuesday that its fourth quarter earnings will be reduced by a $275 million provision for loan and lease losses, about $135 million higher than in the third quarter. The increase in the provision is being driven primarily by higher allocations related to home equity loans, as well as commercial construction and mortgage loans. Fifth Third also expects to record provision expense for unfunded commitments in other noninterest expense of approximately $10 million.

The provision and charges, which are expected to reduce pretax earnings by $220 million, was followed by a Fitch Ratings’ cut in the individual rating of Fifth Third to B from A/B and a revised Rating Outlook to Negative from Stable. The ratings agency said it expects the deteriorating trends in the home equity and commercial portfolios to continue in 2008.

Meanwhile, Citi Investment Research analyst Bradley Ball downgraded the stock of Capital One Financial Corp. to “Sell” from “Hold” in anticipation that further “deterioration in mortgage-related delinquencies and losses, market dislocation around mortgage securities, and some bleeding-through of credit weakness into other consumer categories should put pressure on earnings growth and returns for most of 2008.” The analyst also lowered its price target for Capital One to $45 per share.

National City Corp. announced this week President and CEO Peter E. Raskind will succeed Chairman David A. Daberko, who retires next year. Raskind started at the Cleveland-based company in 2000 as the head of consumer finance. He subsequently was given responsibility for the mortgage operation.

Zacks financial services has issued a sell recommendation on National City because the company’s $1.64 annual dividend is in jeopardy.

“Though the company has now restructured its mortgage operation, we expect some positive effects only after a few quarters,” Zacks said. “If the mortgage situation worsens from here and the losses mount further, we can rule out the possibility of the company cutting its dividend to shore up the capital.”

And residential and commercial mortgage real estate investment trusts continue to be Fitch Ratings’s main area of concern within the U.S. REIT sector for 2008. This, because mortgage REIT’s ability to access adequate sources of liquidity at an attractive cost of funds has been “severely hindered’ with the problems in the asset-backed securities and commercial paper markets, Fitch announced.

Overall, Fitch said it expects U.S. REITs to perform modestly weaker next year, but has given the industry a Stable Outlook partly because stricter lending standards on speculative construction should help offset the curtailed space demand growth that will likely result from a slowing economy. Additionally, because REITs have repositioned their portfolios into stronger markets and are operating at capitalization levels cushioned to weather any slowdown.

“Though credit market disruptions are a concern and are expected to raise the cost of debt capital, prudent REIT financial managers have generally locked into fixed-rate low cost long term debt and have maintained strong and flexible balance sheets,” Fitch said in an announcement. “REIT managers, however, will need to create value through skilled property management, as they will no longer reap the benefits of steep asset appreciation experienced over the past several years.”