The decision of Republic Bancshares in St. Petersburg, Fla., to shutter its troubled mortgage banking unit and eliminate 340 jobs can be traced to turmoil in the financial markets.
In the third quarter the company sold a package of subprime mortgage loans on the secondary market at a 107% premium. But by the fourth quarter- with markets in Russia, Asia, and South America in peril-skittish investors were offering less than Republic spent to make those loans.
"I don't think anyone would say that they saw this (global financial crisis) coming as rapidly as it happened," said Stan Blakey, director of investor relations at $2.3 billion-asset Republic.
Last week Republic announced the immediate closing of its subprime mortgage division, Flagship Mortgage Services, and three out-of-state loan production offices.
At the same time, Republic said it is projecting a fourth-quarter loss of $20 million-up from earlier estimates of $10 million to $13 million-and a $12 million loss for the year. (Republic reports its results only on a companywide basis but Mr. Blakey said the bank subsidiary was profitable during every quarter last year.)
Since 1995 Flagship has made high-loan-to-value loans and then sold them for a quick profit on the secondary market. But with demand withering, Republic chose to transfer the loans to its books rather than sell them at "extremely distressed prices," Mr. Blakey said.
He added that Republic is boosting fourth-quarter loss reserves by 67.5%, to $6.7 million. "We don't feel bad about the quality of these loans; it's just that it's a somewhat riskier asset," Mr. Blakey said.
The expected losses are worse than forecast in November, when Republic first made public its problems with the mortgage subsidiary. At the time, the company projected a 1998 loss of $4 million.
Alan F. Morel, a bank analyst at Hilliard & Lyons Inc. in Louisville, Ky., agreed with Republic's strategy of retaining the loans rather than selling them at a deep discount. "It's not economically worthwhile to give them away," he said.
Mr. Morel said he believes Republic has taken the appropriate steps to resolve its troubles. "This is a one-time event," he said. He does not expect 1999 earnings to suffer.
Republic's Dec. 30 announcement did not surprise investors. In trading Thursday, its stock price remained virtually unchanged, closing at $13.125. Late Monday the stock was trading at $13.50.
Employees received layoff notices on Dec. 30, Mr. Blakey said. About two-thirds of the jobs being eliminated are in Florida, and the rest are in loan production offices in Virginia, Massachusetts, and California.
The company said it will take a $7.5 million charge in the fourth quarter to pay for severance packages and other costs associated with closing the division.
