RBC Bank hit by Fannie-Freddie slide

Count Raleigh-based RBC Bank among the banks across the country taking significant financial hits because of their investments in Fannie Mae and Freddie Mac.

RBC said in a brief statement Tuesday, without providing details, that its holdings in Fannie Mae and Freddie Mac had a book value of $72 million as of June 30. The $72 million appears to refer to the value of the bank's investment after a previously disclosed write-down, said banking experts. It's unclear how much the bank originally invested.

The value of preferred shares of Freddie Mac and Fannie Mae fell dramatically after the federal government seized the mortgage giants last week. One bank reported the current market value has fallen to about 4 percent of its original investment.

Still, investment banker Bill Wagner of Howe Barnes Hoefer & Arnett in Raleigh said RBC can absorb the blow.

"Seventy-two million dollars hurts, but it's not huge for RBC, given their size," he said. RBC had $31 billion in assets and $3.1 billion in risk-based capital as of June 30, and the loss won't affect its "well-capitalized" status.

Eleven other Triangle banks said they had no stakes in the federally chartered mortgage behemoths. A 12th, Raleigh-based First Citizens Bank, disclosed a small investment in Fannie Mae common stock -- $8,353 -- which it is writing off.

Financial statements issued by publicly traded banks and data submitted by privately held banks to the Federal Deposit Insurance Corp. don't break out investments in Fannie and Freddie. Typically stakes in those companies are lumped with other investments, but some banks have begun reporting their Fannie and Freddie exposure -- or lack of -- in light of reports that some banks face substantial losses due to investment in the mortgage companies.

Raleigh's Capital Bank and Crescent State Bank in Cary are among those that have issued statements declaring that they own no Fannie Mae or Freddie Mac shares.

Joe Smith, the state banking commissioner, said about 15 of the more than 90 banks with state charters invested in Fannie Mae and Freddie Mac. Nearly 60 other banks in the state have federal charters or charters in other states.

"In the aggregate, the exposure is not material," said Smith, who declined to identify specific banks. "A couple of our banks have taken something of a hit. But they have more than adequate capital to continue their operations. Their health is not endangered."

Banks with significant exposure to Fannie and Freddie shares concern regulators because such investments are part of a bank's core capitalization. A crimp in a bank's capitalization can hurt its ability to make loans.

Because banks are required to have $10 in capital for every $100 in loans they make, the reduction in lending capacity from losses attributable to Freddie and and Fannie holdings is magnified, Wagner said.

Moreover, this comes as turmoil in the financial markets limits banks' ability to raise capital by selling stocks and bonds.

At least two banks with branches in the Triangle -- Gateway Bank & Trust and Yadkin Valley Bank -- have reported holdings in Fannie and Freddie.

Elizabeth City-based Gateway reported last week that it owns $40.4 million in preferred shares. Gateway has five branches in the Triangle and 37 overall.

"It's a pretty big hit for them," said analyst Samuel Caldwell of Keefe, Bruyette & Woods. He estimates the bank's loss at between $23 million and $35 million as of last week, depending whether it can take advantage of tax benefits.

Gateway officials couldn't be reached for comment, but the bank has expressed confidence that it will be able to maintain its well-capitalized ranking by selling up to $50 million in stock. Banks that fall below "well-capitalized" face certain restrictions, including their ability to boost deposits by selling CDs to institutional investors.

But Caldwell isn't so sure about Gateway's ability to sell stock.

"It seems very difficult, in this environment, for them to raise this amount of capital," he said.

Yadkin Valley Bank of Elkin reported its investment of about $1 million in Freddie Mac has sunk 96 percent in value.

Yadkin, which entered the Triangle market earlier this year when it acquired Durham's Cardinal State Bank, said the loss wouldn't affect its well-capitalized status. Yadkin has 29 branches.

Tony Plath, a finance professor at UNC-Charlotte, doesn't criticize banks for initially investing in Freddie Mac and Fannie Mae. They historically were viewed as safe because of their federal charter, even though they were privately funded. But, he said, the smart banks bailed out as the value of preferred shares plummeted.

One bank that went that route is Wachovia. CEO Bob Steel, who was brought in to turn Wachovia's fortunes around, recently said the bank eliminated its exposure in July by selling $509 million worth of Fannie Mae and Freddie Mac preferred shares, incurring a loss of $171 million.