Three days before the government stepped in to take over Fannie Mae and Freddie Mac, a small Tennessee thrift said it was forced to sell itself because its investment in the government-sponsored enterprises had soured and depleted its capital.

It remained unclear Monday to what extent other community banks and thrifts might suffer after they write down investments in Fannie and Freddie preferred stock. One thing that is clear is that more other-than-temporary impairment charges are on the way from many banks and thrifts that hold the shares.

"With the announcement from the Treasury Department, banks holding this stock would have a difficult time not taking an other-than-temporary impairment charge," said Bill Knibloe, the partner in charge of the Florida financial institutions external audit practice for the accounting firm Crowe Horwath LLP. "Once you get into an other-than-temporary impairment, it does impact regulatory capital."

Industry insiders said they anticipate at least some companies will have to raise capital, and a few — such as the $354 million-asset State of Franklin Bancshares Inc. in Johnson City, Tenn. — could be forced to find buyers.

Federal regulators said Sunday that they intend to work on capital restoration plans with the "limited number" of institutions that have "significant" holdings compared with their capital. The regulators offered little more detail Monday.

A spokeswoman for the Office of Thrift Supervision said the approaches for capital restoration could include appeals to private investment, along with assisted acquisitions similar to the federal support of JPMorgan Chase & Co.'s purchase of Bear Stearns Cos., though on a smaller scale.

Ellen Seidman, a former OTS director who is now the director of the New America Foundation's Financial Services and Education Project, said the agencies' options for helping banks whose capital levels are imperiled include requiring the suspension of dividend payments, working to restructure banks' balance sheets, and, "in extreme scenarios, engineering a merger."

She stressed, though, that current law gives banks and thrifts significant time "to raise capital or do whatever is necessary to get themselves back into position."

One challenge in determining the rescue's impact on preferred shareholders' capital is that many of the shareholders are privately held banks and thrifts that do not disclose their holdings.

But the pain it is causing two large, publicly traded community banking companies with heavy exposure to the preferred shares — Gateway Financial Holdings Inc. in Virginia Beach and Midwest Banc Holdings Inc. of Melrose Park, Ill. — is evident. Both companies hold preferred shares equal to more than 30% of their tangible capital, according to a report released last month by KBW Inc.'s Keefe, Bruyette & Woods Inc., and the sharp decline in the preferred shares' value has spooked investors who fear the companies will need to raise more capital.

Shares of the $2.1 billion-asset Gateway, already well off their 52-week high, fell nearly 25% Monday, to $5.35. Shares of the $3.7 billion-asset Midwest also fell nearly 25%, to $4.48.

Peyton Green, an analyst with First Horizon National Corp.'s FTN Midwest Securities Corp., said Midwest could be forced to raise additional capital through common stock issuance or sell itself.

Its $67.5 million of preferred Fannie and Freddie stock makes up 9% of Midwest's securities portfolio, and any writedown the company is forced to take could be damaging to its capital ratios, he said. And its $158 million of tangible equity "has no real room for cushion."

Calls to Midwest were not returned. In a press release issued Monday, it said it remains well capitalized, "even if the value of its preferred stock investments in Freddie Mac and Fannie Mae were reduced to zero."

One company that has already made the decision to sell itself is State of Franklin, which announced last week that Jefferson Bancshares Inc. in Morristown, Tenn., was buying it for $10.9 million in stock and cash.

Charles E. Allen Jr., State of Franklin's chairman and chief executive officer, said the plunging value of the Fannie and Freddie stock last month forced his company to liquidate the shares at a small fraction of what it paid for them, severely depleting capital.

"We had excellent earnings. We had no problems with loan quality. Our bank was a perfect bank, with the exception that we made the mistake of investing in these government-sponsored entities, and we did that because, like thousands of other banks, we felt those were very safe investments," Mr. Allen said.

The KBW report found that banks and thrifts had roughly $3 billion of exposure to GSE preferred stock, though Samuel Caldwell, the analyst who authored the report, said, "That's just what was disclosed to us." He estimates that the actual figure is between $5 billion and $10 billion.

Still, "I don't think any of these exposures are so big that any one bank will fail just based on their GSE preferred shares exposure," he said.

Though regulators seem unwilling to let any bank fail solely because GSE-related losses, Mr. Caldwell said that such banks would still have to try to raise capital on the open market. That may not be so easy at a time when so many other banks are trying to raise capital to deal with loan losses, he said.

Gateway is one company that needs to raise capital urgently, Mr. Caldwell said, even though it has already raised $23 million in preferred equity and $20 million in subordinated debt over the past year.

Ted Salter, Gateway's chief financial officer, said that the takeover "will have a negative impact on our capital situation," and that his company "will do what we need to remain well capitalized at the end of the quarter."

In late July it said it planned to raise $50 million, in part because of the plunging values of its investments in Freddie and Fannie preferred stock. Mr. Salter would not say Monday whether Gateway planned to increase that amount.

Bob Monroe, the chairman of the financial services division at Stinson Morrison Hecker LLP in Kansas City, Mo., said he suspects few banks will be hobbled by the issue.

"A lot of smaller banks own GSE stock, but they don't own the stock in any magnitude," said Mr. Monroe, who represented Mutual of Omaha Bank in its July deal for the branches and deposits of two failed banks.

But several observers said it could be the one thing that breaks teetering banks that are already struggling with other issues.

Jeff Davis, an analyst at FTN Midwest Securities, said Freddie last issued preferred stock in November, and Fannie did so in May, both at $25 a share. The shares had fallen dramatically by Friday, to roughly $14, and plunged again Monday, to under $3.

"There's no question about it; they're impaired," Mr. Davis said. "And the magnitude is twice what it was last week."

He said he suspects capital-related writedowns would be more of a problem for small banks in general than for large ones. "A lot of the larger banks did a better job of reading the tea leaves."

Joseph Fenech, an analyst at Sandler O'Neill & Partners LP, said he expects other-than-temporary impairment charges to be "a significant issue" for the rest of the year, particularly since many banks have invested in the pooled trust-preferred securities of banks and real estate investment trusts.

Mr. Fenech said that he recently visited 19 banks in Maryland and Virginia, and that one in five are facing significant writedowns in their securities portfolios.

Mr. Davis agreed that "this is just one more asset on the balance sheet that all of a sudden is subject to being written down and coming out of capital at the worst possible time."

Even companies with no direct exposure to the preferred shares could take a big hit.

Damon DelMonte, a KBW analyst, said that Financial Institutions Inc. in Warsaw, N.Y., has $30.8 million of auction-rate preferred equity securities that are collateralized by Fannie and Freddie stock. The securities, after taxes, represent 13% of its tangible capital.

Because the stock will no longer pay dividends, those securities will likely be worthless, Mr. DelMonte said. He estimates this would shave about 16% from its tangible book value, or roughly $2 a share, but he said it has a strong capital position that should enable it to work through the issue without having to raise more.

The company did not return a call seeking comment.

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