Maryland’s first bank failures in a year-and-a-half are “fairly isolated” cases, with the overwhelming majority of institutions considered well-capitalized by regulators, analysts and banking officials said this week.
Late this past week, state banking regulators closed HarVest Bank of Maryland in Gaithersburg and Bank of the Eastern Shore in Cambridge. HarVest’s deposits and most assets were acquired by Sonabank, a subsidiary of Southern National Bancorp of Virginia. Three of its four branches reopened Monday as Sonabank locations with the other one reopening Saturday.
Regulators could not reach a similar deal with another institution regarding the Cambridge bank. The Federal Deposit Insurance Corp. formed the Deposit Insurance National Bank of Eastern Shore, which will remain open until May 25 to allow customers time to transfer funds to other institutions.
“Those two banks have been troubled for a long time,” said David G. Danielson, president of Bethesda banking consulting firm Danielson Associates. Regulators gave them “extended periods of time” to let them try to improve their situations, he said.
Many Virginia banks want to strengthen their presence in the stronger suburban Maryland market, which was a key factor for the greater interest in HarVest’s deposits than Bank of the Eastern Shore’s, Danielson said.
Some 97 percent of banks with headquarters in Maryland are classified as well-capitalized by regulators, the highest possible regulating designation, said Kathleen Murphy, president and CEO of the Maryland Bankers Association.
“The overall Maryland banking industry is strong,” she said. “Earnings and performance have continued to improve during this recession, and we have every confidence that the long-term future is positive.”
Capital ratios decline
In 2010, HarVest entered into a federal consent order to boost capital. John P. “Jack” Hollerbach, who declined to comment, founded the bank with biotech executive John W. Holaday in 2004. Hollerbach stepped down as CEO more than a year ago. When HarVest was formed, its focus was lending to the high-tech business sector.
HarVest’s total risk-based capital ratio — a key measure of bank financial health — fell to 3.66 percent in December from 5.72 percent a year earlier, according to the FDIC. A bank must maintain a risk-based capital ratio of at least 10 percent to be considered well-capitalized by regulators, and is considered undercapitalized with less than 8 percent and “significantly” undercapitalized at less than 6 percent.
HarVest tried to raise capital by several methods, including through a federal immigration program called EB-5 that allows people from other countries to obtain U.S. visas if they invest $1 million in a company. U.S. Immigration Investment Center LLC, a San Jose, Calif., investment firm that formed last August, was among the recent investors.
Harvest had $164.3 million in total assets in December, up slightly from $161.9 million in December 2010.
Bank of the Eastern Shore, which formed in 1986, saw its risk-based capital ratio drop even further than Harvest’s, to 3.44 percent from 8.01 percent a year earlier.
About the only other Maryland bank below the 6 percent level was First Mariner of Baltimore, which had a risk-based capital ratio of 5.47 percent in December. First Mariner Bancorp, the bank’s parent, reported net income of $1.8 million for the first quarter of 2012, its first quarterly gain since 2006’s third quarter.
The asset quality of banks in Maryland and the surrounding region is very good, Danielson said.
Bank of the Eastern Shore had $166.7 million in assets in December, down from $201.8 million a year earlier. All bank deposits are insured by the FDIC for as much as $250,000 per depositor.
Maryland Commissioner of Financial Regulation Mark Kaufman said in a statement that his office had been closely monitoring the two banks.
“Unfortunately, both institutions were significantly impacted by the economic and real estate downturn and were unable to find additional capital to restore themselves to sound condition,” Kaufman said. “At the same time, these are isolated instances and the banking system in our state remains safe and sound.”
Sonabank, of McLean, Va., has increased assets to $611.5 million after forming in 2005. The bank reported net income of $5.6 million last year, up from $1.9 million in 2010. Its risk-based capital ratio was well above well-capitalized levels at 19.85 percent in December.
Most of Sonabank’s branches are in Virginia, although it had one in southern Rockville before the purchase. The former HarVest branch in Rockville is in the northern part of that city in the I-270 life sciences district. Other former HarVest branches are in Bethesda, Germantown and Frederick. Sonabank operates 19 branches, including 14 in Virginia.
“Customers can be confident that their deposits are safe, secure and readily accessible,” Sonabank CEO Georgia Derrico said in a statement. “Clients will recognize familiar branch personnel from HarVest who will take care of their banking needs.”
Sonabank bought the assets and liabilities of HarVest at a $27.3 million discount, receiving $145 million in deposits, $95 million in loans and $6.2 million in other real estate. The FDIC estimated the cost to the Deposit Insurance Fund for the failures was $17.2 million for HarVest and $41.8 million for Bank of the Eastern Shore.
The last Maryland bank failure was the former K Bank of Owings Mills in November 2010. M&T Bank of Buffalo, N.Y., bought its deposits and most assets.