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Q4 Write-Downs May Spike

Q4 Write-Downs May SpikeRecent merger, corporate and earnings activity

December 28, 2007


As mortgage-related losses continue to mount, one analyst’s report projects fourth quarter write-downs will be much more than investors expect. But the current environment didn’t stop at least two mergers from progressing.

Middleburg Financial Corp. warned it would write down $5 million of its $9.7 million interest in Southern Trust Mortgage LLC. The move was taken after an independent firm valued Middleburg’s 42 percent interest in Southern Trust to determine the impairment.

“The impairment of value primarily results from earnings declines associated with the slowdown in loan production volume and the increases to loan loss reserves,” Middleburg stated.

The Middleburg, Va.-based company also said it plans to guarantee up to $15 million of Southern Trust Mortgage’s bank debt after the company’s warehouse lender prohibited further carrying of ineligible loans on the line.

Marshall & Ilsley Corp. announced it anticipates fourth quarter real estate loan charge-offs of $195 million and a loan loss provision of $235 million. But the Milwaukee-based company offered assurance that it is “well positioned to weather the downturn in the real estate market.”

Goldman Sachs released an analyst report indicating Citigroup’s fourth quarter write-down of collateralized debt obligations will be $18.7 billion — far more than the $11 billion the company forecast in November. The company is also expected to reduce its dividend by 40 percent.

Goldman forecast fourth quarter CDO-related write-downs of $11.5 billion at Merrill Lynch and $3.4 billion at JPMorgan, noting that the magnitude of subprime mortgage related write-downs will overshadow solid results in equities at investment banking firms.

“We believe 4Q2007 write-downs are likely to be significantly larger than investors are anticipating. Financial firms’ marks will come under intense scrutiny in the fourth quarter as investors have already seen some aggressive write-downs from other firms in recent weeks,” the report said. “As a result, many of the December year-end firms are likely to be more aggressive with their marks, in our view, particularly those with high levels of exposure such as Citi and Merrill Lynch, both of whom have new CEOs at their helms.”

Goldman reported mortgage-backed securities issuance will fall from $454 billion industry-wide during the fourth quarter of 2006 to an estimated $100 billion during the current quarter.

Despite problems in the credit markets, both Fannie Mae and Freddie Mac were adequately capitalized as of Sept. 30, according to their regulator, the Office of Federal Housing Enterprise Oversight. Fannie’s surplus was $2.3 billion, or 5.9 percent higher than OFHEO’s requirement, declining from 8.3 percent three months earlier, while Freddie’s was $0.6 billion, or 1.7 percent, off from 5.1 percent.

The Federal Deposit Insurance Corp. announced 16 orders of administrative enforcement actions were taken against banks and individuals in September.

Final cease-and-desist orders were issued to American Founders Bank, Inc. in Frankfort, Ky., and Bramble Savings Bank in Milford, Ohio, FDIC reported. A final removal and prohibition order was issued against Bank of Franklin in Meadville, Miss.

Insurance was terminated at Premier Bank in Doylestown, Penn., while a cease and desist order was terminated against Chinese American Bank in New York, N.Y., according to the statement.

Meanwhile, FDIC said it issued final orders for civil money penalties against Panhandle State Bank, Sandpoint, Idaho; Brimfield Bank, Brimfield, Ill.; Western Bank, St. Paul, Minn.; Bank of Crocker, Waynesville, Mo.; First Bank & Trust Company, Cozad, Neb.; Hastings State Bank, Hastings, Neb.; Western State Bank, Devils Lake, N.D.; City Bank, Lubbock, Texas; State Bank of Drummond, Drummond, Wis.; and Marathon Savings Bank, Wausau, Wis.

Shareholders of Benton Bancshares approved the sale of Benton Banking Co. to First Volunteer Corp., according to an announcement today. The sale, expected to close next Monday, also includes T.B. Isbell Insurance Agency and Benton Banking Mortgage Co.

Benton’s chief executive officer briefly disappeared last month, according to published reports. Today, the Associated Press reported that the FBI is investigating $18 million in fake loans at Benton Banking Co. that have left shareholders with nothing.

“We realize this was a challenging situation for the shareholders and employees,” First Volunteer Bank President and CEO Patti Steele said in today’s statement. “First Volunteer Corporation will continue to support shareholders of Benton Bancshares to help maximize the recovery of their investment.”

First National Bancshares Inc. announced it received final regulatory approval from the Office of the Comptroller of the Currency, the Federal Reserve and the South Carolina State Board of Financial Institutions to acquire Carolina National Corp. Earlier this month, shareholders of both companies reportedly approved the deal — expected to close during the first quarter of 2008.


Sam Garcia worked in mortgage lending for twenty years prior to becoming publisher of


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