When Bay Bank took over the failed Bay National Bank last month, little was known about the newly created thrift other than it has a name similar to its predecessor.

Some things haven't changed. Bay Bank retained all of Bay National's 22 rank-and-file employees. And like Bay National Bank in its early years, the new Bay Bank plans to focus on providing a "very high level" of customer service and loan products tailored for small- and medium-size businesses, according to Kevin Cashen, who took over as chief executive.

But other things have changed at the Lutherville-based community bank. The executive ranks have been reshuffled, led by Hugh Mohler, who stepped down as CEO. And the bank is under new ownership backed by Washington private equity firm Hovde Private Equity Advisors, which hopes to turn around the struggling institution.

Bay National Bank had been operating under increased oversight by the comptroller of the currency since early last year. It had been dogged by bad mortgage loans, many tied to investors who bought homes hoping to renovate and sell. When housing values dropped, investors were unable to sell them.

The bank's new management is working to stabilize the institution while reviewing deposit and loan processes. Cashen said the bank would be "prudent" about lending new money. Management also has been reaching out to existing customers and rebuilding corporate ranks, including the business development division, where several employees had left. The bank is recruiting a chief lending officer as well.

"Bay National had been struggling for the last year to 18 months," said Cashen, a Baltimore native and a former executive at Chevy Chase Bank. "Our first challenge is to hire back people who can represent our bank in the community."

Bay Bank's holding company, Jefferson Bancorp, was created by a fund managed by Hovde Private Equity Advisors, which has stakes in several banks and thrifts. The fund has invested $26 million in Jefferson, including $24 million to capitalize Bay Bank, said Joseph J. Thomas, Jefferson Bancorp's chairman and managing director of Hovde.

"We view the acquisition of a failed bank as an attractive entry for an investor group to acquire a platform from which to build a traditional community bank focused on, in this case, metro Baltimore and the Baltimore-Washington corridor," Thomas said.

As the banking sector stages a turnaround, private equity investors are increasingly targeting failed banks across the country as good investments.

"The sense is the economy is doing better, the banking industry is doing better, and not just failed banks but weak banks represent a cheap way to get into the business at this time," said banking analyst Bert Ely. "There's a growing concern the window will be closing in the near future to buy banks cheap as things improve."

This year, four private equity groups, including Hovde, have bought failed banks by seeking conditional approval of a charter from regulators to acquire a bank in receivership, according to research firm SNL Financial. Even more private equity groups have tried to snap up assets of failed banks in a competitive bidding process.

More than 100 banks have failed nationally this year, on top of 140 closures in 2009, according to the Federal Deposit Insurance Corp. In the past two years, five banks have failed in Maryland.

Last year, the Federal Deposit Insurance Corp. implemented new guidelines for private equity investors interested in acquiring or investing in failed banks, setting high capital level requirements and prohibiting investors from selling the bank for three years, among other rules.

"We want to see that they take a long-term approach to the banking industry because banking is all about relationships," FDIC spokesman David Barr said.

Thomas, of Hovde, said the firm is committed to a long-term strategy for Bay Bank, which includes "opportunistically looking at additional bank acquisitions."

The new bank's management team includes executives with decades of experience in Maryland financial institutions. Cashen is joined by bank chairman Kevin Byrnes, who was president and chief operating officer at Provident Bankshares Corp.

Bay National had $217.7 million in assets and $212.6 million in deposits at the end of June, according to a regulatory filing. Having assumed Bay National's soured mortgages, Cashen said, the bank also needs to settle those bad loans.

"One of the advantages we have is we have a nice portfolio of deposits and loans," Cashen said. But, he added, "There's a hidden downside. … We took all the loans, including those that went bad. We need to work with customers and come to the best solution for both parties."

While many businesses are curtailing their spending and expansion plans because the economic recovery remains shaky, Cashen is optimistic about Bay Bank's future.

"It takes a while to build rapport and get your name out there in the market," Cashen said. "As we get people and tell our story, we hope the market will begin to rebound in the second half of the year and next year, and we'll be well-positioned to be there as that happens and meet the needs of these customers going forward."

hanah.cho@baltsun.com

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