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Federal Regulators Seize, Sell Md. Bank

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By Binyamin Appelbaum
Washington Post Staff Writer
Saturday, January 31, 2009

Federal regulators yesterday seized Suburban Federal Savings Bank in Crofton in the first bank failure in the Washington area since 1993.

Suburban Federal, a small bank with seven branches, was immediately sold to Virginia-based Bank of Essex. All deposits were protected.

Regulators also seized banks in Utah and Florida yesterday, raising the number of January failures to six, the most in any month during the current recession.

The failure of Suburban Federal was all but announced in advance. The bank had been running out of money it needed to absorb mounting losses on mortgage loans. The company was told by regulators in November to find a buyer. An insurance company flirted with the notion, then backed away. Last week, regulators issued an ultimatum, threatening to close the bank if no buyer emerged.

Suburban Federal specialized in mortgage lending and such banks, known as thrifts, have proved particularly vulnerable during the current crisis. Thrifts including Washington Mutual and IndyMac Bancorp have failed, while others such as Chevy Chase Bank and Countrywide Financial have been sold after running into financial difficulties.

The Office of Thrift Supervision, which regulated all of those banks, said Suburban Federal began in 2005 to originate more high-risk mortgage loans.

"Its problems resulted from the failure of the Board of Directors and managers to oversee an aggressive lending program," the OTS said in a statement yesterday.

Suburban Federal was founded in 1954, and chief executive Robert Morrison Jr. is the grandson of the founder. In 2004, the private company acquired Westview Savings Bank of Baltimore, and regulators say it soon started easing underwriting standards on its mortgage loans, including allowing borrowers to submit reduced documentation of their income. The company also expanded its lending to residential real estate developers. Almost immediately, some of its borrowers fell behind on payments.

By last year the losses were overwhelming the company. Through the first nine months of 2008, Suburban Federal reported losses of $27 million, leaving only about $4 million in its capital reserve -- less than a third of the minimum amount required by regulators.

Aegon, a Dutch insurance company with a U.S. headquarters in Baltimore, filed for permission in November to buy the thrift, but withdrew the application in December.

Bert Ely, a banking consultant who followed the company's troubles, said regulators waited far too long to act, resulting in a relatively expensive failure. The Federal Deposit Insurance Corp. estimated that it will incur losses of $126 million in resolving the bank's $360 million in assets, an unusually high proportion.

"Any time you see a loss percentage that high, that is a clear failure to act for too long," said Ely, who has raised concerns about a similar pattern in other recent failures.

The OTS said in a statement that the agency became aware of the company's problems during a routine examination in February 2007 and barred the company from making further development loans, the first in a series of regulatory actions culminating with yesterday's seizure.

The buyer, Tappahannock-based Bank of Essex, is a subsidiary of Community Bankers Trust, which got a taxpayer investment of $18 million in December. In November, the company acquired a failed bank in Georgia, the Community Bank, from the government.

The last bank to fail in the Washington area was City National Bank of Washington in 1993. That was the tail end of a long period dense with failures as savings-and-loans collapsed and small commercial lenders floundered.

Several local banks that have faced mounting troubles in recent months have found buyers, including Abigail Adams National Bancorp of the District, Fidelity & Trust of Bethesda and Chevy Chase Bank.

Regulators seized two other banks yesterday, Ocala National Bank in Florida and MagnetBank in Utah, matching the largest total on any day of the current crisis. MagnetBank was only three years old, and noteworthy because regulators were unable to find a buyer like they usually can with troubled banks. The bank will be liquidated instead.


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