Signature Bank Slides as CDO Havoc Spreads

Plummeting market values of asset-backed securities continue to plague financial institutions that had been considered to have conservative balance sheets.

Signature Bank(SBNY Quote), a New York-based commercial bank, on Thursday reported a $21 million writedown of collateralized debt obligations and other asset-backed securities it owned because of deteriorating market values.

Signature has been considered by some to be an undervalued growth stock, as the mid-cap bank has been rapidly expanding its loan base in the New York City metropolitan area.

Shares hit a 52-week low on Thursday, sliding 7.7% to $28.95 in afternoon trading.

Altogether, Signature booked a loss of $3 million, or 10 cents a share, in the quarter, compared with a profit of $8.9 million, or 30 cents a share, a year earlier.

What made the loss particularly troubling was the fact that Signature was believed to have one of the better balance sheets in the business. Over the past six months, the company's management stressed to investors that it did not own any asset-backed securities issued after 2005. Such securities were generally considered less toxic, as underwriting standards became sloppier after 2005 as the housing boom hit its peak.

Nonetheless, Signature on Thursday said it decided it must write down the value of some of these securities -- specially six collateralized debt obligations and six asset-backed securities issued in 2004 to 2005, which were rated AA and A.

Lately, trading in many of these types of securities has ground to a halt, except for fire sales.

A good chunk of these complex securities are backed by mortgage payments on residential homes, where either home prices are falling or borrower risk of default is growing.

"We fully recognize the challenges brought about by the dislocated and illiquid mortgage securities marketplace," Signature CEO Joseph Depaolo said.

Although the securities that were written down have performed well and maintained their ratings, the company concluded that the securities were other than temporarily impaired according to accounting standards, Depaolo said.