Shares of Provident Bankshares Corp. fell 11 percent yesterday after the bank said it will write off $28.9 million of its real estate investment trust portfolio, making it the latest victim of the nation's declining housing and credit markets.
In a related move, the Baltimore-based bank also said it is increasing its provision for bad loans by $6 million in the fourth quarter in recognition of the region's slumping housing market.
The bank said it has only limited exposure to the subprime mortgage business in its loan portfolio.
The write-down of the securities portfolio, which has no exposure to the subprime market, will result in a fourth-quarter hit of 91 cents per share, the bank said. Its share price fell $2.16 to $16.81 in trading yesterday. That's less than half its 52-week high of $36.04.
Gary N. Geisel, Provident's chairman and chief executive, said the bank is well-capitalized and does not expect further write-downs in the near term based on what it sees today. And some analysts estimate the value of the securities will bounce back significantly once credit markets stabilize.
"I'd say that on both actions - the loan portfolio and investment portfolio - the common denominator is residential housing," Geisel said.
Fitch Ratings sharply downgraded a large segment of the national pooled real estate investment trust, or REIT, securities market last month. As a result, Provident wrote down its investment in eight national pooled REIT securities, resulting in the noncash charge. The securities, which are currently valued at $66 million on the bank's balance sheet, will be written down to the current fair market value of $18.6 million.
However, each of the eight securities are current on interest and principal payments. Up to 24 percent of the issuers in the pool would have to default before Provident would lose interest income. So far, an average of 6.5 percent have defaulted, bank officials said. Defaults would have to rise to 35 percent before the bank would lose principal on the investment.
"The intrinsic value of the bonds is greater than the value we've written them down to," Geisel said.
Jeff Davis, an analyst with FTN Midwest Research in Nashville, Tenn., said the write-down was necessary because the market for such securities has dried up, making them difficult to value. He estimates the bank could recover up to 80 percent of the amount written down within two to three years as the market recovers.
"It's just better in this era to err on the side of conservatism," said Davis. He has a neutral rating on the shares and doesn't own any.
Analysts said the strength of the Baltimore/Washington real estate market has shielded Provident from big losses on real estate loans up to now. But the extended slump is taking a toll. The bank may have to raise its provision for bad loans in future quarters, analysts predicted. Provident has a roughly $4 billion loan portfolio. About 60 percent of those are commercial loans, with the other 40 percent being consumer loans.
The bank had $51 million set aside for bad loans in the third quarter.
"These issues, in a nutshell, are issues that every bank, or at least a handful of banks, are facing," said Collyn Bement Gilbert, an analyst with Stifel Nicolaus & Co. in New Jersey. Stifel makes a market in Provident shares and does business with the bank.