The Mid-Atlantic Banking Journal

A BankIntel Publication

Mid-Atlantic Banking Journal

I am pleased to announce that I have joined BankIntel as an advisory director and contributing editor to assist BankIntel with the launch of the Mid-Atlantic Banking Journal.

Mid-Atlantic Banking Journal will provide in-depth analysis on banks located in the Mid-Atlantic region consisting of Maryland, Virginia, West Virginia, Pennsylvania and Delaware.

Paul Joegriner, Advisory Director and Contributing Editor

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Maryland Community Bank Sector

2nd & 3rd Quarter 2009 Update

Previously…

In my last Maryland Community Bank report for the 1st quarter of 2009, I discussed what had happened to Maryland financial institutions during the last six months of 2008.

Lets recap…

TARP Money

16 banks in Maryland received TARP funds totaling ~$426million

Who Got Sold •  Provident Bank sold to M&T Bank

•  Issues: •  Heavy investment portfolio losses – Trust preferred and Agency MBS. •  Lack of core funding. •  Relied on home equity loans as driver of growth.

•  Chevy Chase Bank sold to Capital One (I know Chevy Chase Bank isn’t really a Maryland Based bank. But it really is. It moved its charter from

Maryland to Virginia in 1996 so as to take advantage of tax laws related to its credit card business. Let’s remember, it maintains its corporate headquarters and more than 50% of its branches in Maryland)

•  Issues:

•  Heavy non-traditional mortgage lending products (the Infamous Cash-Flow Option Arm Mortgage).

•  Invested heavily in wholesale mortgage banking. •  Got caught holding the bag with a significant amount of loans it could not sell or

securitize when the secondary mortgage markets collapsed.

Who May Need to Sell

•  First Mariner Bank •  First Mariner is bleeding red. Though it is considered to be well capitalized, including an

additional $6 million from its parent, First Mariner Bancorp is one of those banks in the $500 million to $2 billion asset size that I call a “DMZ Bank.”

•  Wilmington Trust FSB •  Another DMZ bank. I am not sure how this bank qualifies as a Maryland based bank. It has

no branch offices in the state and a suite address at 111 Calvert St. It operates essentially as an internet bank (and we know how successful internet only banks have been). Its holding company, Wilmington Trust Corporation of Delaware, received $330 million in TARP money yet its year end capital ratio is 5.13%.

•  K Bank •  And yet another DMZ bank. This bank had been doing well year after year until 2008. Its

losses this year has been primarily driven by the need for increased loan loss provisions. The question is how much more will it need in 2009. Also, the bank’s core funding is very weak. Approximately 20% of it deposits is core funds.

“DMZ Bank” defined: Banks ranging in assets from $500 million to $2 billion. A zone just like a military DMZ, where anyone or anything entering that zone is at risk of termination. Not an easy place to be.

What Does the Future Hold? "We are seeing the next wave of industry consolidation, either in the form of managed consolidation, encouraged by the regulators, or strategic acquisitions of banks with solid core deposits and an established franchise“ - Paul Joegriner, “Chevy Chase Bank, Citi in talks, Sale would boost New York institution's presence in state. The Business Gazette of Politics and Business, 14 Nov 2008.

•  The signs are not positive: •  One third of all U.S. banks will disappear in the next five years. It’s getting

harder and harder to be a mid-tier bank (those in the $500 million to $2 billion range).

•  What does that mean for Maryland Banks? Maryland can expect to lose up to 30 of the 94 banks in the next five years.

•  In the last five years, especially during the boom, Maryland chartered only seven new banks.

Enforcement Actions •  Four Maryland banks received enforcement actions since June of 2008.

•  Suburban FSB has since been taken over. It had a Cease and Desist issued against it in March 2008.

•  None of our credit union brethren in Maryland have received enforcement actions from its primary regulator, National Credit Union Administration (NCUA).

2nd & 3rd Quarter Update

•  Industry Update

•  TARP Money

•  Enforcement Actions

•  Failures

•  Potential Seizures

•  Close Watch

Industry Update

Two quarters have passed. Maryland banks have fared very well compared to other states, but the clock is ticking. The state of Maryland banks has seen a slow and steady decline. Between September 2008 and September 2009, Maryland banks had a 284% decrease in net income from a positive $60 million to a negative $109 million. If the tea leaves are correct, Maryland will lose at least 2 more banks in 2010. The regulatory agencies are under pressure to take action and clean up. Please read on….

Industry Update (cont’d)

A concern for the industry and economic growth is the decline in industry assets of 18% driven by a 22% decline in loans and leases. Commercial and Industrial (C&I) loans declined 14% and real estate development (C&D) loans declined 38%. A major reason for the decline in loans is the high charge-off rate of 137% compared to one year ago. In dollar terms, Maryland Banks have charged-off $127 million. While deposits was up 12% for the state, most of those deposits went to the big banks or non-Maryland banks. Deposits decreased 15% for Maryland banks compared to one year ago. Community banks are in a tough position competing for deposits against big banks and larger out-of-state banks.

Industry Update (cont’d)

Nonperforming assets increased 34% for residential mortgage loans, 119% for C&I loans and commercial real estate was 61%.

The Texas ratio for all Maryland banks combined increased to 44% from 29% one year ago. When this ratio is 100%, it is highly likely that a bank fails. The industry’s Texas Ratio indicates potential failures are in the system due to the non-performing assets. A Texas ratio in the range of 10-15% would mean that there is less stress in the system. These numbers tell us that the Maryland banking system is not going to turn around in 2010.

TARP Money

•  5 more banks in Maryland received TARP funds totaling ~$33 million.

•  A total of 20 banks have received $458 million in TARP funds.

TARP Repayments •  2 Banks, have fully repaid TARP and 1 bank has made a

partial payment.

•  Most of the Maryland TARP recipients are not financially sound enough to repay TARP.

TARP Repayments

Enforcement Actions •  10 more Maryland banks have received enforcement actions. •  Bradford Bank was taken over on Friday, August 29, 2009. Its deposits were sold

to M&T Bank. •  Bradford had a Cease and Desist issued against it in February 2009 and a Prompt

Corrective Action in July 2009. •  No Maryland credit union brethren has received and enforcement action from its

primary regulator, National Credit Union Administration (NCUA).

Quick Facts •  The combined net income for all Maryland banks

was a negative $109 million for the 3rd quarter of 2009. •  54 banks had a combined positive income of $62 million. •  34 banks had a combined loss of $171 million. •  Assets, Deposits and Equity was down 10%, 7% and 6%,

respectively

•  The most profitable bank was Eagle Bank of Bethesda with income of $8.5 million.

•  The least profitable bank was Eastern Savings Bank of Hunt Valley with a loss of $ 30 million.

Top Ten (and Bottom) by Income

Ten Most Profitable through September 30, 2009

Ten Least Profitable through September 30, 2009

Failures •  Suburban FSB – January 2009, Texas Ratio at failure was

503%.

•  Bradford Bank – August 2009, Texas Ratio at failure was 535%.

•  Pressing Bank issues: •  Continued capital degradation. •  Non-current loans still trending up. •  Commercial Real Estate vacancies up. •  The Dreaded Texas Ratio…is 500% the failure proxy for the

regulators?

Potential Failures

• K Bank

• Eastern Savings Bank

•  Sykesville FSB

• All three are on the unofficial FDIC “problem bank” list.

K Bank

•  I said back in the last report, K Bank was on my DMZ list and may need to sell.

•  Tier 1 and Total Risk Based Capital Ratios of 4.60% and 5.88%, respectively.

•  Texas Ratio: - @ 9.30.09 – 253% and @ 12.31.08 – 104%. - Could hit 325% by year end 2009.

•  K Bank has a significant construction loan problem. -  Almost 50% its loans are in construction/land development loans (The

building industry took taken a beating in the recession and no rebound is expected in 2010).

-  97% of its REO book are construction loans.

Eastern Savings Bank

•  Tier 1 and Total Risk Based Capital Ratios of 15.84% and 17.09%, respectively, would indicate that this bank is sound, however…

•  Issued Enforcement Order. •  Texas Ratio:

- @ 9.30.09 – 379% and @ 12.31.08 – 166%. - Could hit 425% by year end 2009.

•  48% of assets are non-performing of which, almost all are residential mortgage loans.

•  It was rumored that the bank was engaged in predatory mortgage lending practices (hence, the large size non-performing residential loans).

Sykesville FSB

•  Issued Enforcement Order - Cease Desist in 2007, Renewed in 2008

-  Directors fined in 2009 (Civil Money Penalty)

•  Tier 1 and Total Risk Based Capital Ratios of 13.69% and 14.35%.

•  Texas Ratio: - @ 9.30.09 – 258% and @ 12.31.08 – 311%.

Close Watch

•  First Mariner Bank •  Texas Ratio at 91% for period ended 09.30.2009. •  Tier 1 Capital Ratio – 6.66% and Total Risk Based Capital Ratio is

8.42%. •  Sold Mariner Finance for $10.7million, $8.9 in cash. That should

help Tier 1 get to 7.00% depending 4th earnings.

•  Ideal Federal Savings Bank •  Texas Ratio is at 90% for period ended 09.30.2009. •  Equity Capital is $300K. •  Ideal probably has a buyer. No other reason to file for mutual-to stock

conversion application. •  This is probably the cheapest OTS charter available currently.

Close Watch (cont’d)

•  Colombo Bank •  Texas Ratio is 85%. •  Tier 1 Capital Ratio – 10.75% and Total Risk Based Capital Ratio is

11.23%. •  Independence Federal, the other Bender bank, has a Texas Ratio of

41% at 09.30.2009. •  The Texas Ratio is probably one of the issues holding merger

application between Colombo and Independence.

•  Waterfield Bank •  Most likely will be sold by March 2010. Equity capital is $974,000. •  If it’s not sold, it will have to be shut down.

Next Issue

•  It’s not all bad news. There are banks that are performing very well in the Mid-Atlantic market. We will talk about those in the next quarterly update in March/April 2010.

•  We will also talk about strategies for 2010: •  Managing Nonperforming Assets

•  Increasing core funding

•  We have an interview with a bank CEO lined up.

•  Also, the March/April 2010 report will be released in a newsletter format so that we can provide more in-depth analysis.