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High Finance

Recent mergers, acquisitions and other corporate activity

September 18, 2007



photo of Coco Salazar
A merger between two banking associations moved one step closer to closing while another deal is falling apart. Other recent corporate activity included the de-reitization of a subprime lender, a bank’s $32 million settlement with regulators and a $700 million plunge in mortgage related revenues at an investment banking firm.

But first, Coastal Banking Company Inc. announced it appointed Paul R. Garrigues as its chief financial officer.

Union Bank of California N.A., which agreed to pay $22 million to settle charges it failed to administer an anti-money laundering program after having previously agreed to so, must fully implement significant measures within a year to avoid criminal prosecution, the U.S. Department of Justice announced.

The San Francisco bank also consented to an additional $10 million civil money penalty assessed by the Office of the Comptroller of the Currency and Financial Crimes Enforcement Network for alleged violations of the Bank Secrecy Act. In addition to an inadequate anti-money laundering program, the bank failed to timely file suspicious activity reports.

“When banks fail to uphold their responsibilities, they turn their legitimate business into a currency stash house used by international drug traffickers to line their pockets, fuel more trafficking, and corrupt government officials and global economies,” said Drug Enforcement Administrator Karen P. Tandy in an announcement.

Lehman Brothers today said it recorded “very substantial” valuation reductions, most significantly on leveraged loan commitments and residential mortgage-related positions, that resulted in a net reduction in revenues of approximately $700 million in its fixed income capital markets business. The lower performance within credit and securitized products was the primary driver of the unit’s revenues plunging 47 percent annually to $1.1 billion in the third quarter.

NovaStar Financial Inc. announced it won’t pay a dividend on 2006 profit, which will in turn end its tax status as a real estate investment trust dating back to Jan. 1, 2006. The Kansas City, Mo.-based lender said, “because of a substantial decline in its market capitalization during recent months, combined with its inability to consummate a planned rights offering and demands on the company’s liquidity, it cannot create enough value through the issuance of preferred securities to satisfy the REIT distribution.”

The subprime lender will file a 2006 tax return as a general C corporation and expects termination of its REIT status to have “a significant adverse impact” on third quarter results. As a result of the change in corporate structure, NovaStar is reviewing applicable listing requirements of and engaging in discussion with the New York Stock Exchange.

“Clearly, we did not anticipate the drop in market value or the level of demands on liquidity caused by the market turmoil this summer,” NovaStar Chairman and Chief Executive Scott Hartman said in the announcement. “Based on these events, we now believe canceling the previously planned dividend is the only reasonable and prudent course of action.”

The pending $1.8 billion acquisition of PHH Corp. by GE Capital Solutions may not go through as a result of a contingency involving the planned separate transaction in which General Electric agreed to sell PHH’s mortgage operations to an affiliate of The Blackstone Group, PHH indicated in an announcement. A possible shortfall of up to $750 million in GE’s bank funding would allow Blackstone to back out from purchase, and, in turn, GE Capital, which intends to buy the mortgage operation from Blackstone immediately afterward, would also be relieved of its purchase obligation.

PHH said it advised GE Capital it expects to fulfill its obligations to close the merger, although no assurances can be made.

Following PHH’s announcement, Moody’s Investors Service reported it changed the lender’s Baa3 senior debt rating review status to direction uncertain from possible upgrade due to the uncertainty of the merger with GE Capital.

Meanwhile, EverBank Financial Corp terminated its agreement to acquire NetBank’s consumer deposit accounts, business finance division and other assets. The termination comes “after it became clear that NetBank would not be able to complete certain conditions required to close and receive regulatory approval,” and “we are disappointed that the transaction was unable to be consummated,” EverBank announced.

EverBank disclosed in May it was in the process of acquiring the NetBank assets, including its mortgage servicing portfolio. In that same month, NetBank shut down wholesale mortgage operations and abandoned NetBank Funding Services after closing subprime subsidiary Meritage Mortgage late last year. At the time of the merger announcement, NetBank note that its expected loss on sale of between $60 and $70 million at the deal’s close followed large operating losses resulting from the difficult mortgage origination market and other financial pressures that had significantly reduced its capital position and prompted heightened regulatory oversight.

One merger that is step closer to closing, however, is that between America’s Community Bankers and the American Bankers Association. ACB’s board has approved the merger and, now, members of both organizations must give their approval for the transaction to become effective Dec. 1. When combined, members will represent 95 percent of the assets of the nation’s $11.5 trillion banking industry and make the organization the premier bank trade association, according to a news release.

Coco Salazar is an associate editor and staff writer for

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