Takeover will affect some area banks
As Wall Street generally applauded Sunday’s takeover of mortgage giants Fannie Mae and Freddie Mac, some banks in Western New York found themselves left holding the bag, in the form of nearly worthless preferred stock of the two companies.
Financial institutions are among the largest holders of Fannie Mae and Freddie Mac preferred shares, whose value will be heavily diluted by the federal government’s rescue plan. The shares are still outstanding and will not be cancelled by the government, but they are now worth much less than even their depreciated value before the weekend.
The plan protects the mortgage- backed securities investments packaged and issued by the two mortgage giants, as well as the companies’ senior debt. But both common and preferred shareholders will take the first hits from any further losses at Fannie and Freddie in order to protect taxpayers.
“Shareholder value faces a high risk of a total wipeout,” Kathleen Shanley, bond analyst at research firm Gimme Credit, wrote in a report Monday.
That means the banking industry may have to write down or write off the value of their stock holdings in the two companies, adding to the nearly $500 billion in losses banks and brokerages have already suffered from bad mortgages and investment securities.
According to a joint statement by four bank regulatory agencies Sunday, officials have been “assessing” bank exposures to Fannie and Freddie and believe there’s only “a limited number of smaller institutions” with significant holdings compared to their capital.
Locally, institutions that own Fannie or Freddie stock include M&T Bank Corp., Financial Institutions’s Five Star Bank, and Northwest Bancorp’s Northwest Savings Bank.
Warsaw-based Five Star is the most heavily exposed, with $31.5 million in stock and auction- rate securities backed by Fannie and Freddie preferred stock and $89.3 million in debt issued by full U. S. government agencies or the two mortgage-oriented government-sponsored enterprises, or GSEs. Details were not available Monday about how much of the debt was from Fannie and Freddie, as opposed to Treasury debt.
But that’s a total of $120.8 million in potential exposure, or nearly 17 percent of the $726.3 million in total investment securities held by the bank, which has $1.9 billion in assets. The company in the second quarter already recorded a $3.8 million charge to write down the value of four investments, but may have to record more.
Five Star officials did not respond to requests for comment.
Buffalo-based M&T has $162 million in preferred stock from Fannie and Freddie, but that represents just 1.9 percent of its $8.7 billion in total investments.
The bank already marked $42 million in “unrealized” losses against its capital base in the second quarter, and has since increased that to $103 million as of Aug. 31, said Chief Financial Officer Rene Jones during a previously scheduled presentation Monday. That leaves just over $58 million left.
But while that has so far only held down growth in the bank’s equity capital base, Jones noted, it hasn’t significantly harmed the level of capital, which is just below the bank’s minimum target level of 5.2 percent of assets. And the bank has a history of generating new capital at two to three times the rate of its peers, which has enabled it to absorb the losses without having to raise new capital from the markets, he said.
And Northwest, of Warren, Pa., said it has just $4.7 million in Freddie Mac preferred shares, which is just 0.4 percent of its $1.3 billion in investments.
“Generally, we feel the announcement . . . was positive for financial institutions and consumers,” said spokesman Jim Holding.
