Local bank will record Fannie Mae write-down

Officials of Bank of the James said Thursday that the Lynchburg-based bank will write down more than $1.5 million worth of stock it owns in Fannie Mae, one of two mortgage giants taken over by the federal government Sept. 7.

The write-down represents the lost value of Fannie Mae stocks the bank holds. The investment represented 4 percent of the bank’s investment portfolio, and only about 1 percent of its assets.

It does not affect deposits held by Bank of the James, bank leaders said, but it will create negative earnings for the third quarter.

The write-down comes on the heels of nearly a full year of the bank breaking its own income records from prior years.

“This is an isolated incident and it’s no threat to the safety and soundness of our bank,” said Robert Chapman, president.

Andy Farmer, spokesman for the State Corporation Commission, said most state-chartered banks, like Bank of the James, have good capital on hand to help withstand a write-down.

Several state banks recently have announced write-downs of their investments, but Farmer did not have an exact number.

The commission’s Bureau of Financial Institutions “will analyze the situation and monitor market conditions to ensure that banks remain financially healthy.”

Fannie Mae was formed in 1938 as a government-backed company to buy mortgages and sell them to investors. The goal was to help more Americans buy homes. Freddie Mac was formed for the same purpose in 1970.

The two companies attracted investors because they were backed by tax dollars and because they exercised strict lending requirements, Chapman said.

Bank of the James purchased $2 million worth of preferred stock in Fannie Mae over the past nine months, said Todd Scruggs, vice president.

The stock provided Bank of the James with about $40,000 in dividends per quarter, Chapman said.

The bank leaders did not know Fannie Mae was holding subprime mortgages.

“With the (credit) rating agencies slapping a AA on it, you depend on them, to a certain extent, to do the due diligence for you,” he said. “ ... The rating agencies should have factored (subprime loans) into the rating.”

When rumors emerged this summer that Fannie Mae and Freddie Mac were facing financial troubles, it surprised Bank of the James.

“For years they had always been the hallmark of guidelines,” which other banks modeled for safe lending, Chapman said.

Scruggs said the bank did not sell its Fannie stock before the takeover because the condition of Fannie Mae had not been confirmed.

“There (are) a lot of market rumors, which you can’t always go out and sell on, because they aren’t always correct,” he said.

On Sept. 7 the federal government seized the two mortgage giants to keep the firms from failing, hoping to shore up investor confidence.

Since then, the stock value has plummeted to less than $2 per share, making Bank of the James’ portion worth only about $160,000 now.

When an investment loses substantial value, a financial accounting rule requires a company to consider whether the investment might gain ground again, Scruggs said.

If the answer is no, then the company usually writes off the lost value, he said.

The bank’s board of directors chose that route Tuesday, Scruggs said. The exact amount of the write down will be between $1.7 million and $1.9 million. It will be determined by Fannie’s stock price on Sept. 30, he said.

While that doesn’t affect the bank’s loans or deposits, it will drain the bank’s earnings. “This basically takes 11 months of our earnings out of the equation,” Chapman said. “Now we’ve got to go out and get that back.”

In 2007, Bank of the James had net earnings of about $2 million.

In the bank’s nine years, it has faced other setbacks. Several years ago a group of defaulted loans cut the bank’s earnings, Scruggs said, but it returned to profitability.

“The team of folks that we have here, when there’s another challenge, … they kick it into another gear and increase earnings,” Chapman said.

The bank plans to open branches in Bedford and Altavista, to “take our brand of banking to other parts of the region,” Chapman said.

“We’re still the same bank.”

Scruggs said the rest of the bank’s portfolio is doing well. It contains some mortgage investments purchased from Fannie Mae and Freddie Mac, but those are backed by government dollars, he said.

A number of banks in Virginia have recently announced write-offs for Fannie or Freddie stock. Bank of the James is the first community bank in the Lynchburg area to do so.

Forest-based Select Bank does not own any stock in the troubled mortgage companies, said Sherri Sackett, the bank’s assistant vice president for marketing.

First National Bank of Altavista also holds no Fannie Mae or Freddie Mack stocks, according to Rob Gilliam, bank president.