To the growing list of reasons many community banks’ earnings are suffering, add the declining value of their investments in Fannie Mae and Freddie Mac.
At least 10 publicly traded bank and thrift holding companies — and perhaps more privately held ones — took other-than-temporary impairment charges for the fourth quarter on preferred stock issued by the government-sponsored enterprises.
The writedowns range from $576,000 at Farmers National Banc Corp. in Canfield, Ohio, to $13.3 million at Astoria Financial Corp. of Lake Success, N.Y. Neither company lost money for the quarter, but the impairment charges contributed to steep declines in earnings from a year earlier.
Bankers cited two factors for the writedowns.
First, Fannie and Freddie are two of the biggest players in the mortgage market, and the housing slump has lowered the values of their common and preferred stock.
Fannie and Freddie "are having a lot of issues,” said Frank Paden, the president and secretary of the $800 million-asset Farmers National. “We don’t know that it is going to gain some value back anytime soon.”
Second, both GSEs issued high-yielding preferred stock in the quarter, lowering the value of previously issued preferred stock.
Freddie, seeking to raise $6 billion, began issuing preferred stock in November, pricing it at $25 a share with a fixed dividend rate of 8.375% through Dec. 31, 2012. Fannie followed a month later with an offering priced at $25 a share with a fixed dividend rate of 8.25% to 2010. It is looking to raise $7 billion.
The issuance of stock has caused previously issued preferred shares to decline by 20% to 30%, said Todd Sprang, the Midwest financial institutions practice leader for Grant Thornton LLP.
When financial institutions are considering other-than-temporary charges, they must consider how far the value has fallen, how long it has been in decline, and when it is expected to recover, Mr. Sprang said.
In some cases, though, analysts say bankers were being opportunistic with their writedowns.
With many companies posting losses from deteriorating credit quality, those with otherwise sturdy earnings decided to “get the bad news out of the way” in the “kitchen sink quarter,” Mr. Sprang said.
Jeffrey Rulis, a research analyst with D.A. Davidson & Co., said bankers “are dumping them in with everyone else’s poor results” for the fourth quarter. “The market is less concerned with earnings and more concerned with credit quality right now. It just seems like a good time to come out with it.”
Farmers National’s earnings declined 37%, to $1 million. Without the writedown, the results would have been comparable to the $1.6 million it earned in the fourth quarter of 2006.
Mr. Paden said that he understood why other banks would follow that tactic, but Farmers National did not take the charge for that reason. Its managers originally wanted to wait to see how the stock fared in the first quarter, but ultimately they decided to take the charge at the suggestion of its external auditors, he said.
“It may regain some value, but we don’t know that,” Mr. Paden said. “In the meantime, I now have $50 stock that is trading at $28 a share.”
