Earnings Preview: Countrywide Financial may raise reserves
NEW YORK—Countrywide Financial Corp. reports first-quarter earnings on Tuesday. The following is a summary of key developments and analyst opinion related to the period.
OVERVIEW: Countrywide, like nearly all mortgage lenders, has been hit hard since mid-2007 with rising delinquencies and defaults among borrowers and deterioration in the housing market.
In February, Countrywide' delinquencies as a percentage of unpaid principal balance rose to 7.44 percent from 4.48 percent during the same month the previous year.
Through the first two months of the first quarter, Countrywide funded $47.54 billion in mortgages, a 35 percent decline from the first two months of 2007.
In January, Countrywide agreed to be purchased by Bank of America Corp. in an all-stock deal worth about $4 billion at the time. Countrywide shareholders will receive 0.1822 shares of Bank of America stock for every share of Countrywide they own.
BY THE NUMBERS: Analyst projections range widely for Countrywide, largely because of difficulty anticipating the size of the company's loss reserves. For nine analysts polled by Thomson Financial, estimated results range from a loss of 88 cents per share to profit of 80 cents per share. The average estimate is for profit of 2 cents per share.
ANALYST TAKE: Lehman Brothers analyst Bruce Harting recently slashed his first-quarter estimate to a loss of 88 cents per share from earnings of 10 cents per share because he expects Countrywide to "make large additions to reserves."
Weak credit trends, especially among its option adjustable-rate mortgage and home equity products portfolios, will force Countrywide to greatly increase its loan-loss reserves throughout the year, Harting wrote in a research note. Harting said Countrywide will need to reserve $5.1 billion during the year to cover losses, $1.7 billion more than his earlier forecast.
Option adjustable-rate mortgages allow borrowers to choose one of multiple monthly payment options, including paying less than the interest owed on the loan, for a set portion of the repayment period.
Other banks have been hit by rising reserves to cover bad loans in the quarter, including Washington Mutual Inc. -- which like Countrywide was a large originator of subprime mortgages and home equity products. Washington Mutual lost more than $1.1 billion during the first quarter as it set aside $3.5 billion to cover bad loans.
WHAT'S AHEAD: Bank of America is expected to complete its acquisition of Countrywide in the third quarter. The deal is expected to make Bank of America the largest mortgage lender and servicer in the nation.
STOCK PERFORMANCE: Shares of Countrywide Financial fell 35 percent during the first quarter. They closed Friday at $5.84.
rising
falling 