Pikeville-based Community Trust Bancorp reported a third-quarter loss Wednesday because of the federal takeover of mortgage brokers Freddie Mac and Fannie Mae.
Other publicly owned Kentucky banks that hold Freddie Mac or Fannie Mae securities also are expected to report lower earnings in the next few weeks as they write off the value of securities once thought to be as safe as the U.S. government.
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"No one would have ever believed we would be in this situation," Community Trust Chairman and CEO Jean R. Hale said. "We are in uncharted territory as a country and as a financial institution."
Kelly May, spokeswoman for the Kentucky Office of Financial Institutions, said fewer than 20 of about 160 state-chartered banks hold similar securities. In the most extreme case, 30 percent of one unidentified bank's equity was invested in the securities, May said.
Community Trust Bank, with nearly $2.1 billion in deposits, is the largest state chartered bank.
On Wednesday, Community Trust said it lost $577,000, or 4 cents for each share of its common stock, for the three months that ended Sept. 30 after it wrote off $14.9 million in Freddie Mac and Fannie Mae securities.
Without the one-time loss, the bank would have earned $8.8 million, or 58 cents a share, for the third quarter, compared with $10.5 million, or 68 cents a share for the same period of 2007.
The write-down reduced Community Trust's earnings for the first nine months of 2009 to $16.6 million, or $1.71 a share. For the same months of 2007, the bank earned $27.4 million, or $1.77 a share.
The effect was not devastating because of Community Trust's size. The bank is still considered "well-capitalized" by regulatory standards, with more than double the required capital in several key categories.
But it turned a good quarter into a loss and is likely to confuse some customers at a time when emotions are running high, Hale said.
Freddie Mac and Fannie Mae are quasi-governmental entities that buy mortgages, bundle them and resell them in the form of securities to banks and other investors.
On Sept. 7, the U.S. Treasury took over the entities because of losses on subprime loans and other problems. The Treasury stopped paying dividends on the securities held by Community Trust and other investors, and issued new senior preferred securities to raise capital.
The banks had to write off the older securities because their value had become unclear.
Will the banks get their money back?
"There is a possibility of recovery, but nobody knows at this point," Hale said.
The stock of Community Trust Bancorp is listed by Nasdaq as CTBI. It closed Wednesday at $29.50 a share, down 71 cents.