Some banks may need to raise funds

Antonakes says 'handful' must offset stock losses

The state's top banking regulator said several Massachusetts banks will need to raise additional capital to offset losses from holdings in mortgage lenders Fannie Mae and Freddie Mac, which were put into federal receivership earlier this month as part of the government's response to the financial crisis.

State banking commissioner Steven Antonakes declined to name the banks, except to say it is "a small handful," and added the sector overall remains well-capitalized.

At least seven local banks have disclosed they will write off assets or take charges. These include Eastern Bank, where a spokesman yesterday said it plans to write off about $7 million; Mayflower Bancorp of Middleborough, which plans to charge off about $1.9 million; Brookline Bancorp., which plans a charge of about $1 million; and LSB Corp., parent of RiverBank of North Andover, which said its net income will drop.

The losses result from the banks buying shares of preferred stock from Fannie and Freddie, which are equity shares that carry a higher priority than a company's common stock in distributing dividends or in the case of a dissolution.

As part of their plan to preserve billions of dollars for Fannie's and Freddie's operations, federal regulators this month said they would suspend dividend payments on the companies' common and preferred shares. The move wipes out about 90 percent of the preferred shares' value on average.

Banks have protested the dividend suspensions because the preferred shares were counted on their balance sheets as capital - in essence part of the funds necessary to support their lending operations. Banks are required to maintain certain capital levels, and if they fall below those thresholds, such as when a capital holding loses value, they must raise new funds. They can do that in several ways, including cutting their own dividends, selling stock to the public, or taking in outside investment.

Meanwhile, US Representative Barney Frank, who is leading the Democrats' strategy on the financial bailout in the House of Representatives, yesterday said he would like to give banks a tax break to help them absorb their losses. And Federal Reserve chairman Ben Bernanke said financial regulators are also looking into helping the banks.

So far, only two small banks have said their capital ratios have been thrown out of whack by the losses. Service Bancorp. of Medway, the parent of Strata Bank, said Sept. 12 that write-offs of preferred shares worth $7.2 million will lower its capitalization levels. The company is in talks with regulators to improve its position, the bank said. It has more than $400 million in total assets.

And Central Bancorp of Somerville also said it could have a slightly lower capitalization level if it decides to write off all or most of the $10.1 million it held in Fannie and Freddie shares.

Cambridge Savings chief executive Robert Wilson said his company will likely record an expense related to its holdings, but declined to specify the amount. A spokeswoman said it will remain well-capitalized.

For most banks, the losses won't reduce the ratio of their capital levels required by regulators. The biggest known loser locally appears to be Sovereign Bancorp., a Philadelphia financial institution with substantial banking outlets in Massachusetts, which said Sept. 8 it will take an unspecified charge for the $623 million of preferred shares it held in the two companies. A Sovereign spokesman declined further comment.

Massachusetts has the greatest number of banks that bought preferred shares in the two national mortgage lenders, according to a recent count by the American Bankers Association. Antonakes said that might be because the state has more banks than most. He added, "The industry remains healthy and well-capitalized. There will be a few instances in which capital will need to be augmented."

Ross Kerber can be reached at kerber@globe.com.