Two more Baltimore-area banks, including the region's second-largest locally owned institution, have been placed under more intense federal supervision, according to regulatory documents, showing how deeply community banks are hurting from the collapse of the real estate market.
The Office of Thrift Supervision issued "cease and desist" orders late last month against Eastern Savings Bank of Hunt Valley and Baltimore's Bradford Bank.
Regulators shut down Suburban Federal Savings Bank of Crofton in late January, Maryland's first bank failure in 17 years, and at least a half-dozen other Baltimore-area banks are operating under heightened scrutiny. They include Eastern Savings and 1st Mariner, which rank second and third among locally based banks by market share in the Baltimore area.
No. 1 is Provident Bankshares, which is being sold to M&T; Bank.
"The vast majority of banks in Maryland are considered well-capitalized, which is the highest rating you can get from the regulators," said Kathleen Murphy, president of the Maryland Bankers Association.
Eastern and Bradford, both privately owned, agreed to the OTS orders without admitting or denying the agency's findings.
In Eastern's case, the OTS said the bank engaged in "unsafe and unsound practices" that led to a "high and increasing amount of delinquent and defaulted loans."
It required Eastern to revise its loan underwriting policies and stop accepting or renewing brokered deposits without regulatory approval. Brokered deposits are high-interest investments sold through brokers to attract money. Nearly one-third of Eastern's deposits came through brokers, according to Federal Deposit Insurance Corp. data.
In a statement, Eastern officials said they have been working closely with regulators since an examination last March identified the problems and have adopted many of the mandated actions.
Officials said daily operations are unaffected, adding, "Eastern Savings Bank has very high levels of capital and is very unlikely to fail, now or in the future."
Eastern, with roots going back to 1905, has four branches in the Baltimore area, assets of about $1 billion and deposits of nearly $850 million, according to the FDIC. The bank lost $4 million in the fourth quarter, although it reported a $2.5 million profit for the year. Its core capital is about 12 percent of assets, a figure normally considered very strong.
Despite that capital position, Eastern Savings has been high on a number of national lists of troubled banks because it carries an extraordinarily high number of defaulted real estate loans - a reflection, management says, of its unusual strategy of buying such loans at a discount and trying to make a profit on them.
In its order, the OTS ordered Eastern to assess the value of collateral for each loan that is at least six months overdue and regularly update those assessments to make sure it was accounting for the loans properly.
"Once I understood their strategy, I became more comfortable with it," banking consultant Bert Ely said. "But that was in more normal circumstances. We are not in normal conditions. The OTS may feel that strategy is too risky for today's conditions."
Yaakov S. Neuberger, chairman of the bank's executive committee, defended the strategy. "It has been a great business and it one day again will be a great business," when the real estate market recovers, he said.
Bradford Bank has nine offices in Baltimore, with $504 million in assets and about $401 million in deposits at the end of last year. The bank lost $6.9 million last year, including $2.1 million in the fourth quarter.
Banking consultant Ely said Bradford's reserves for loan losses are "grossly inadequate" given the value of loans that are past due or in default.
Regulators said that Bradford pursued "an aggressive growth strategy that was poorly planned and executed, unsupported by adequate and appropriate levels of capital."
Bradford filed papers last fall to conduct a stock offering but has been stymied by the poor market. If it cannot raise money on its own, the OTS said, Bradford should seek alternatives, including a merger or acquisition partner.
Regulators also told the bank to stop originating commercial, construction and nonresidential real estate loans.
"We are working with the regulators to resolve the issues identified," bank President Dallas Arthur said yesterday. He declined to comment on the possibility of finding a merger partner.
AT A GLANCE
Eastern Savings Bank
Headquarters: Hunt Valley
Number of offices: five
Deposits: $849.6 million
Assets: $1.03 billion
Number of offices: nine
Deposits: $401.4 million
Assets: $504.4 million
Source: Federal Deposit Insurance Corp.