Provident Bankshares, the biggest Maryland-based banking company, is the rare lender that hasn't admitted huge mortgage losses in the worst housing market in decades. Financial ghoul that I am, I rang up Provident and grilled its bosses on mortgage exposure.
I found some risk -- and $58 million in unrealized losses on mortgage bonds and other debt securities at the $6 billion bank. But it's almost impossible to own even quality mortgage securities these days without their value having been pummeled. Provident will be harmed if we head into a recession, but so far it has navigated the housing storm better than many of its rivals.
"We underwrite based on whether the borrower can repay in good times or bad times," says Provident chief executive Gary N. Geisel.
If the economy keeps heading the way it's going, those words would be put to the test.
The biggest worry may be millions Provident invested in bonds backed by "alternative A" mortgages, those that are lower quality than prime loans but better than subprime, and in securities issued by real estate investment trusts, including mortgage pools.
These have lost millions in market value as investors flee anything labeled "housing," and soured alt-A loans are causing big headaches for First Mariner, Provident's cross-town rival.
But Provident officials make a good case that the mortgage payments and other cash flows underlying their investments are in good shape.
None of the securities is of the "subprime" flavor that has burned so many lenders, says Dennis A. Starliper, Provident's chief financial officer. Provident owns $135 million in alt-A mortgage bonds not guaranteed by government agencies. But Starliper says no underlying loan is for more than 80 percent of a house's value, and the average loan-to-value is 70 percent.
This is far better than nutty loans people made that were worth more than the house. Even if home prices plunge 25 percent, Provident should have decent collateral. And the borrowers' credit scores are almost all over 700 -- far above those of many alt-A homeowners.
Quality alt-A paper has plunged so far from what seems to be its intrinsic value, Starliper says, that "frankly I would like to invest more in that." (Careful!)
Provident also owns $90 million in debt and preferred stock backed by real estate investment trusts, including mortgage pools and those connected with homebuilders. These, too, have fallen in value. "It's one we continue to watch but don't have any particular concern about losing principal or income on," says Starliper.
All told, however, Provident showed a paper loss of about $21 million on mortgage bonds and $37 million on other debt investments as of Sept. 30.
(Two weeks ago M&T; Bank disclosed a similar, unrealized loss of $100 million on structured debt obligations.)
These assets have almost certainly declined further in value since then. Barring a quick turnaround, Provident will be under increasing pressure to admit a loss and mark them down on its income statement -- cutting into profits.
Like many lenders, Provident also issues home loans directly. It hasn't originated first mortgages in years, having judged that the low-margin business was better suited for big, national players.
But it has dived enthusiastically into second mortgages (which, if borrowers go bankrupt, get paid off only after the first mortgage). It owns $250 million in second mortgages bought several years ago, and it also holds a billion-dollar portfolio of locally issued home-equity loans and lines of credit.
About $120 million of the local loans are subprime. But taken as a whole, Geisel adds, the billion-dollar portfolio has performed in an "exceptional" manner, requiring write-offs of only about one-tenth of 1 percent.
None of this is news to sophisticated investors. Provident stock has been hammered along with other financial shares, falling by more than a fourth since early October to $23.
When a sector goes out of favor, the sinking elevator takes everybody down. But not everybody deserves to be on board.
I won't tell you to buy Provident stock, as investment house Stifel Nicolaus has. (Other analysts rate it neutral.)
But as mortgage risk goes, the company seems to have avoided temptations to which some rivals succumbed.
Friday's column by Jay Hancock stated incorrectly that investment company Stifel Nicolaus had a "buy" rating on Provident Bankshares stock. Stifel has rated Provident a "hold" since Oct. 18.The Sun regrets the errors.