LandAmerica Financial Group Inc. announced a non-cash write down of approximately $21 million, or $13 million after taxes, in the Lender Services segment.
Freemont General Corp., one of LandAmerica's tax and flood processing customers received a cease and desist order from the Federal Deposit Insurance Corp. relating to lending practices in its mortgage origination business.
As a result of the probable loss of business from this customer, LandAmerica determined this is a resulting impairment of its customer relationship intangible asset related to the October 2003 acquisition of LandAmerica Tax and Flood Services Inc., formerly known as LERETA Corp. In accordance with Generally Accepted Accounting Principles (GAAP), management conducted an impairment test of the customer relationship intangible asset of LandAmerica Tax and Flood Services Inc.
Additionally, management conducted an impairment test of the Lender Services segment's goodwill balance in accordance with GAAP before its annual testing date of October 1, as the loss of business was deemed to be an indicator of potential impairment. Although procedures related to the review of the intangible asset and the goodwill balance have not been completed, on April 10, management determined it was probable that LandAmerica Tax and Flood Service's customer relationship intangible asset was impaired by approximately $21 million. The impairment charge will be reflected in LandAmerica's results of operations for the three months ended March 31, scheduled for release on April 24.
In addition, management has initially concluded that the Lender Services segment's goodwill balance is not impaired. The goodwill balance related to the Lender Services segment as of Dec.31, 2006 was $297 million. The intangible assets related to the Lender Services segment after the write-down are expected to be approximately $29 million, with approximately $7 million relating to LandAmerica Tax and Flood Services, Inc.
"We were disappointed with this development in our Lender Services business," said Chairman and Chief Executive Officer Theodore L. Chandler Jr. "We remain focused on initiatives to improve return on equity even if the real estate environment does not improve."
As previously reported, steps were taken in 2006 to improve return on equity. These actions included reducing headcount, redomesticating LandAmerica's primary insurance subsidiaries to Nebraska to provide additional cash dividend capacity in 2007 and 2008, and implementing technology initiatives, including Project Fusion, the company-wide initiative to reduce the complexity and costs of over 300 operating systems to a substantially reduced number of applications when completely phased in by end of year 2008. Management currently expects that the technology initiatives will generate annual cost savings of approximately $35 million beginning in 2009. Additionally, headcount declined by approximately 500 full time employees (FTEs) in fourth quarter 2006. Each FTE reduction generates average annual cost savings of approximately $55,000.
During first quarter 2007, LandAmerica repurchased approximately 569,000 shares of common stock for $39.9 million, at an average cost of $70.18 per share. This completes the repurchase of 1.25 million shares under the 2005 authorized program. As previously reported, in February 2007 the board of directors approved a repurchase program expiring in October 2008 that authorizes LandAmerica to repurchase an additional 1.5 million shares of its common stock upon completion of the 2005 program.
The portion of LandAmerica's future available capital that will be devoted to the repurchase of shares of LandAmerica's common stock cannot be determined at this time because some key elements of the formula for determining future available capital, including LandAmerica's 2007 underlying statutory earnings, the after-tax impact related to those earnings and overall market conditions, are unknown. As a result, LandAmerica is unable to furnish an estimate of the impact of share repurchases on return on equity for future periods.
LandAmerica's long-term goal is to achieve an average 15 percent return on equity during the full real estate cycle. Absent unusual circumstances, LandAmerica expects return on equity at the low end of the cycle to be in the 10 percent range and at the high end of the cycle to be in the 20 percent range.