Pulaski
Two months ago, Missouri Banking Commissioner Eric McClure wouldn’t have given a second thought to seeing preferred stock in Fannie Mae and Freddie Mac in a bank’s investment portfolio.
Then over the weekend, the federal government placed the two mortgage giants in conservatorship, yanking them from the private sector to government control. Dividends on the already battered preferred shares were suspended, and they lost much of their remaining value this week.
"It’s changed totally now," McClure said. Shares once seen as investment grade have suddenly become junk.
However, McClure said none of the 300 Missouri banks regulated by the state is in jeopardy because of their investments in Freddie and Fannie.
"In no case is a bank going to fail because of that," McClure said. State-chartered banks in Missouri have capital ratios averaging 9 percent, well above the 6 percent of total assets the state requires, he said.
Jorge Solis, director of Illinois’ banking division, said a review of investments by the 480 state-chartered banks in Illinois shows that those that held preferred shares in Fannie and Freddie have enough capital to continue operating safely.
Creve Coeur-based Pulaski Bank was among those dumping the stocks this week. The bank’s parent, Pulaski Financial Corp., Wednesday issued a statement saying that it had sold its 350,000 preferred shares in Fannie, taking a loss of $5.2 million. The company expects to take a charge of 51 cents a share against earnings for its fourth quarter, which ends Sept. 30.
Missouri doesn’t regulate Pulaski, which is a federally chartered savings association.
Ramsey Hamadi, Pulaski’s chief financial officer, said that as recently as July, Fannie Mae preferred shares still were considered solid investments, though their value had declined. The bank noted in a filing that month that its $8.9 million investment in the shares had declined in value to $8 million.
"Now it is a speculative investment," which isn’t suitable for the bank’s portfolio, Hamadi said fast cash online. "We are disappointed. It certainly is not something that you could have forecasted to occur and not as quickly."
Pulaski’s capital is still well above the 6 percent of assets required by regulators to be considered well-capitalized, Hamadi said. It’s core capital stood at 8.29 percent before selling the shares. The sale would take the ratio to 7.93 percent.
Kansas City-based Commerce, the largest Missouri-based bank,; Enterprise Bank & Trust Co. and Centrue Financial Corp., both of Clayton; and First Banks Inc. of Creve Coeur did not hold the shares, they said. None of the other locally based banks has given notice that it has the shares or plans to sell them.
U.S. Bank, the market share leader here, has $97 million in preferred stock of government-sponsored entities, said Lisa Clark, a spokeswoman. The bank considers the amount "very manageable," at less than one percent of its capital, she said.
Frank Sanfilippo, chief financial officer at Enterprise, said the government takeover of Fannie and Freddie has sent a shock wave through the industry. About 8,000 banks held the shares, regulators have said.
A bank that holds the shares has two choices, Sanfilippo said. It can either sell them and take the loss against earnings directly, as Pulaski did. Or it can hold them and write their value down to the current market price. Either way, bank earnings can take a hit.
A loss can affect the bank’s total equity capital, and in some cases, it can change the bank’s rating from "well-capitalized" to "adequately capitalized." Dropping to "adequate" can have a number of effects on a bank’s finances.
For one thing, the rates the Federal Deposit Insurance Corporation charges to insure the bank’s deposits will go up. Insurance rates already were going up because of bank failures that put a strain on the FDIC’s reserves.
Lower capital ratios also could cut off a bank’s access to the wholesale deposit market, Sanfilippo said. Some banks have turned to so-called