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Lenders Warn of Q4 Charges

Lenders Warn of Q4 Charges

Recent mergers, earnings & corporate activity

January 14, 2008

By COCO SALAZAR

photo of Coco Salazar
As fourth quarter earnings reports begin to emerge, the news isn’t good. But despite the current environment, one class action law firm is questioning whether Bank of America Corp.’s proposed acquisition of Countrywide Financial Corp. is a fair deal for shareholders.

Provident Bankshares Corp. wrote down the value of eight securities it holds in its real estate investment trust portfolio that will result in a $28.9 million charge in the fourth quarter, plus it has increased the provision for loan losses by $6 million to reflect the inherent increase in loss rates in its real estate loan portfolios. Together, the charges will lower the bank’s fourth quarter earnings by $31 million.

The securities investments at issue are pools of preferred stock and debt issued by commercial mortgage and diversified equity REITS, residential mortgage REITS, homebuilders, and commercial mortgage-backed securities. The loan loss provision boost is primarily related to delinquency increases in the company’s residential construction, business banking and consumer home-equity lending portfolios.

CIT Group Inc. boosted loan-loss reserves by $300 million in the fourth quarter primarily due to “continued weakness in home lending markets.” The charge, predominantly related to its held-for-investment home lending portfolio, is expected to reduce fourth quarter earnings by $190 million, contributing to the overall anticipated net loss of $125 million to $135 million, the New York-based company announced Friday.

A nearly $1.6 billion non-cash charge Sovereign Bancorp expects to incur in the fourth quarter includes $738 million it will set aside for bad loans and leases, compared to $650 million in the third quarter, and a $27 charge related to an estimated loss on financings that Sovereign provided to two mortgage companies that have defaulted on certain agreements.

Downey Financial Corp. today said it will reclassify $99 million in loans as non-performing at Sept. 30, 2007 because of changes in accounting standards after a review of the retention program plan it implemented in last year’s third quarter. The Newport Beach, Calif.-based lender’s program allowed qualified borrowers of option adjustable-rate mortgages to refinance into ARMs that do not permit negative amortization and with rates that were below those on the original loans. With the update, non-performing assets totaled 7.8 percent of total assets at yearend 2007, of which 40 percent are loans modified under the retention program, and, of these, 95 percent continue to make on-time payments.

The modifications to the performing loans were initially not considered to be troubled debt restructurings because modification was only made to those borrowers who were current with their loan payments and the new interest rate was no less than those offered new borrowers. However, “in the current interpretation of GAAP, especially in the current housing market, there is a rebuttable presumption that if the interest rate is lowered in a loan modification, the modification is deemed to be a troubled debt restructuring unless the modified loan can be proved to be at a market rate of interest based upon new underwriting, including an updated property valuation, credit report and income analysis,” Downey explained.

Finkelstein Thompson LLP said is investigating potential shareholder claims involving Countrywide, specifically whether the deal with Bank of America fairly compensates Countrywide shareholders. The transaction calls for BoA to buy Countrywide for $4.1 billion in stock in the third quarter, giving 0.1822 of a share of its stock in exchange for each share of Countrywide. Analysts reportedly said the deal valued Countrywide’s shares at $7.16, a 7.6 percent discount to its closing price Thursday of $7.75. After the early-Friday announcement of the deal, Countrywide shares plummeted more than 13 percent to $6.71 at the open of trading and continued to drop throughout that day.

Fremont Investment & Loan has agreed to sell the fixed assets and assign its lease obligation of its Irving, Texas loan servicing facility to an undisclosed buyer, parent Fremont General Corp. reported. The buyer will pay the deal in cash and is expected to offer jobs to facility employees who meet its hiring needs and criteria. Fremont expects to realize annual cost savings of approximately $12 million with the sale, which is expected to close this quarter and does not include Fremont’s mortgage servicing rights. Fremont continues to maintain its primary loan servicing operations in Ontario, Calif.

The deal is part of a strategic plan to “reduce overhead expenses, in this case by eliminating operational inefficiencies inherent in operating two loan servicing centers,” Santa Monica, Calif.-based Fremont said in the announcement. “This transaction is also part of a strategic plan to fully transition out of the company’s discontinued residential real estate business as we work towards the successful turnaround of the company.”


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