Two Baltimore-area banks failed Friday in the latest sign that many financial institutions are still suffering from the fallout of the mortgage crisis, even as the economy has begun to recover.
Regulators closed Bay National Bank and Ideal Federal Savings Bank — both reeling from bad loans — but were able to find a buyer for only one of the community banks.
Bay National's deposits have been sold to a newly created thrift, Bay Bank of Lutherville. Bay National's two branches in Lutherville and Salisbury will reopen Monday, and customer accounts will automatically be transferred to the new Bay Bank, according to the Federal Deposit Insurance Corp.
In Ideal Federal's case, the FDIC couldn't find a buyer for the Baltimore lender that had one office and was among the oldest black-owned businesses in the country. Instead, the agency made arrangements to pay out insured deposits with the help of M&T; Bank in Baltimore.
Bay National was the 87th and Ideal Federal Savings the 88th bank failure in the country this year, according to the FDIC. Banking analysts said that risk in the financial system has trickled down from large banks to regional and community banks that are still feeling the effects of the economic downturn.
"The highest risk of failures now are among smaller, locally based institutions," said Greg McBride, senior financial analyst at Bankrate.com. "If the biggest employer in town goes out of business, all of a sudden a lot of loans on the bank's books can go bad in a hurry. And that's a common theme that plays out every Friday night across America, when several more institutions shut their doors for the last time."
Though some economic indicators have improved, the rate of bank failures has quickened this year. There were 52 bank failures at this point in 2009. One other Maryland bank has failed this year, Waterfield Bank of Germantown, which closed March 5. Suburban Federal Savings in Crofton and Bradford Bank of Towson closed last year.
When reached by phone Friday, Yvonne Lansey, Ideal's president, said she couldn't discuss the takeover because she was balancing the books. Ideal had $6.3 million in assets at the end of March and $5.8 million in deposits.
Hugh Mohler, chief executive of Bay National, didn't return calls about the takeover. Bay National had assets of about $282.2 million at the end of March, and $276.1 million in deposits.
At Bay National headquarters Friday evening, about 50 FDIC employees arrived at the bank to begin the process of taking it over and shifting to new ownership. FDIC employees wheeled in briefcases and boxes for files.
Booker T. Shorter, senior ombudsman specialist with the FDIC, said its employees came from all over the country, including Florida, Chicago and Dallas, and expected to work through the weekend.
All rank-and-file bank employees will be retained under the new ownership, Shorter said.
Banking analyst Bert Ely said Bay National most likely failed because of problem loans in the areas of construction development for single- and multifamily residences and other construction projects, as well as home mortgage loans and some commercial real estate loans.
"This is a bank that had a relatively high level of nonperforming assets," Ely said. "And the regulators concluded they wouldn't be able to raise the capital to keep the bank well-capitalized. This is the kind of thing we're seeing around the country."
Mohler, a former executive at Mercantile Bankshares Corp., started Bay National Bank in May 2000 after parent company Bay National Corp. raised $11.3 million in a public offering.
Bay National had been operating under increased oversight by the Office of the Comptroller of the Currency since early last year. The bank was ordered to come up with a plan to deal with problem loans and boost its capital.
In an interview with The Baltimore Sun last year, Bay National executives blamed the troubles on the collapse of the real estate market. Bay National had extended mortgages to investors hoping to renovate homes and sell them. Many of the homes were around Baltimore's ritzy Inner Harbor. But housing values dropped, and investors were unable to sell the houses.
Stuart Greenberg, a private banker based in Baltimore, said Bay National had been heading toward a failure for months.
"They got greedy, they got stupid, they got arrogant," Greenberg said. "They started doing some loans they never should have been doing. It eventually catches up with you."
Little is known about the freshly minted Bay Bank. The Office of Thrift Supervision approved an application Friday for the creation of Bay Bank under a new holding institution called Jefferson Bancorp in Washington, OTS spokesman William M. Ruberry said.
Ely said it is "highly unlikely" that the same owners are involved in the newly created Bay Bank.
Bay National's closing is expected to cost the FDIC's insurance fund about $17.4 million, and the closing of Ideal would cost the fund $2.1 million.
Customers shouldn't expect any major changes as Bay National switches hands, the FDIC said.
"The transition will be barely noticed by the general public," said LaJuan Williams-Young, an agency spokeswoman.
Ideal struggled with losses, problem loans and difficulty competing because of its small size, Ely said. When it closed it had one office, two employees and no ATM machine. As a small institution, it likely would have found it increasingly difficult to make investments in new technology and to meet increased regulatory burdens placed on banks amid the financial crisis.
"The bank was just not viable from a long-term perspective as a business," he said. "These smaller institutions are just fading away."
The bank had about $1 million worth of troubled loans on a total loan book of about $5 million, a high rate of problem loans, Ely said.
About a dozen FDIC employees were involved Friday with poring over Ideal Federal's accounts and assets and liabilities in preparation for returning the money of depositors Monday. Some of the FDIC specialists had laptops and could be seen working inside the bank, a small corner brick building on Druid Hill Avenue.
The FDIC has arranged for insured funds in Ideal savings accounts, NOW accounts, certificates of deposit and other types of accounts to be transferred to a branch of M&T; Bank at 715 N. Howard St., where customers can gain access to their money between Monday and July 24. The FDIC will make a bus available Monday from Ideal to the M&T; branch.
Customers will no longer be able to write Ideal checks and must appear in person to claim their money or set up a new account, regulators said. Any funds not claimed by July 24 will be sent to the owner's address on file.
Ideal customers with brokered CDs should contact their brokers for information on their funds, the FDIC said.
Opened in 1920, Ideal was an outlet for black customers at a time of rampant discrimination in lending. According to Creative Investment Research, an analyst of minority- and women-owned banks, Ideal was one of the nation's oldest continuously operated black-owned businesses.
Kathleen Murphy, president of the Maryland Bankers Association, said that Maryland banks remain strong.
"It's important to emphasize that 93 percent of Maryland's headquartered banks are classified as 'well-capitalized,' which is the highest regulatory designation possible," Murphy says. "Some institutions have had their challenges, but the industry as a whole is strong."
Baltimore Syb reporters Gus G. Sentementes, Jamie Smith Hopkins and Lorraine Mirabella contributed to this article..
Failed banks in Maryland:
Ideal Federal Savings Bank of Baltimore closed Friday
Bay National Bank of Lutherville closed Friday
Waterfield Bank of Germantown closed March 5
Bradford Bank of Towson closed Aug. 28, 2009
Suburban Federal Savings Bank of Crofton closed Jan. 30, 2009
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