Financial institutions both locally and nationally are starting to suffer fallout from the government's Sept. 7 takeover of mortgage giants Fannie Mae and Freddie Mac.
City National Corp. said in a Sept. 11 regulatory filing that it will incur a noncash impairment charge of as much as $13 million in the third quarter as a result of its exposure to Fannie Mae and Freddie Mac. The Beverly Hills-based parent of City National Bank holds preferred shares issued by the mortgage giants, but owns no common stock or other equity securities issued by them.
As part of the takeover, the Treasury Dept. has taken an equity stake in the companies through newly created senior preferred shares and eliminated dividends on previously held preferred shares. As a result, existing shareholders, such as City National, are suffering.
The bank, which declined further comment, is among the first to quantify its expected losses as a result of the takeover, though many banks are expected to take a hit. Wells Fargo & Co. and U.S. Bancorp have each said they expect writedowns as a result of their exposure.
After incurring substantial losses from the mortgage market collapse, Fannie Mae and Freddie Mac were seized by the U.S. Treasury Dept. Sept 7 and placed into a government-run conservatorship. Fannie Mae and Freddie Mac are privately owned, government-sponsored enterprises that purchase mortgage loans from originators. The two are among the largest financial companies in the nation, but have suffered multi-billion-dollar losses during the housing market bust.
City National's securities investment in Fannie Mae and Freddie Mac, at $23.6 million, accounts for about 1 percent of its total investment portfolio. Trouble is looming for many banks, however. Pasadena-based East West Bancorp Inc., for one, has a $45 million exposure to the mortgage giants, which accounts for more than 6 percent of its tangible equity.
But while equity holders are preparing for losses, the takeover could be a boon for those that buy agency-backed mortgage securities primarily mortgage real estate investment trusts since the government is guaranteeing it will back the securities.
Indeed, debt holders rallied in the days following the takeover. Locally, Santa Monica-based Anworth Mortgage Asset Corp. saw its stock jump more than 11 percent, closing Sept. 11 at $7.38.
Talk about rough times.
Security Pacific Bank of Los Angeles has been issued a cease and desist letter by the Federal Deposit Insurance Corp. detailing a spate of "unsafe or unsound banking practices" alleged to have been committed by the institution.
Among the many practices listed in the complaint, the bank is "operating with inadequate capital," "operating with management whose policies and practices are detrimental to the bank" and "operating in such a manner as to produce operating losses."
The complaints stretch as far back as September 2007, according to the filing.
The FDIC issued a number of directives to improve the bank's business, including installing managers with "qualifications and experience commensurate with his or her duties and responsibilities at the bank."
Security Pacific did not return calls requesting comment.
The bank, previously known as Golden Pacific Bank and later as Network Bank USA, adopted the name Security Pacific Bank in 2005. It has no connection with the iconic Security Pacific Bank, which was one of the largest banks headquartered in Los Angeles until it was acquired by Bank of America Corp. in 1992.
The bank is the 24th largest in Los Angeles County as ranked by its $588 million in assets as of June 30. However, it ranked 74 out of 75 banks in its profitability, with a negative 13.2 percent return on assets as of June 30.
Comings and Goings
Community Bank, a Pasadena-based regional bank with $2.3 billion in assets, announced that Chief Executive Francis Shanahan died Sept. 7. A replacement has not been named Nara Bancorp Inc., the Los Angeles-based parent of Nara Bank, has appointed Cliff Sung as chief credit officer. Sung replaces Bonnie Lee, who resigned effective Sept. 12 The non-profit Los Angeles Venture Association has elected Nevena Orbach president, John Dmohowski treasurer and Matt Crowley secretary for the 2008-2009 term Brea-based Fremont General Corp. announced the resignations of Chief Executive Stephen Gordon and President David DePillo. Richard Sanchez will serve as interim chief executive.
Staff reporter Richard Clough can be reached at firstname.lastname@example.org or at (323) 549-5225, ext. 251.
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