Harvest Bank gets regulatory warning from FDIC

By Danielle Douglas
Monday, September 20, 2010

Gaithersburg's Harvest Bank of Maryland is working to relieve some of the pressure on its burdened balance sheet following a recent enforcement order from the Federal Deposit Insurance Corp. The regulatory warning comes as the regional bank is suing defunct mortgage lender Countrywide Home Loans for breach of contract related to a portfolio of distressed loans that have wounded the bank.

At the end of August, the FDIC made public an agreement Harvest signed in June in which the bank promised to enact several measures to boost capital and reduce the amount of delinquent debt on its books. While the government considers the bank to be adequately capitalized, a regulatory determination based on leverage and risk ratios, the agency wants Harvest to further shore up its reserves.

Harvest, which has $207 million in assets, has recorded several quarterly losses in the wake of the recession, most recently registering a half-year loss of $1.4 million.

Regulators are also eager to have the bank deal with some of the $21.2 million in troubled loans on its books. That amount has risen from $2.3 million in 2007 to $14.2 million in 2009. Through the end of June, Harvest had $134 million in net loans, more than 10 percent of which is in trouble, according to data from Highline Financial, a financial research firm.

Since the onslaught of the recession, about eight local banks have been hit with enforcement orders from regulators. Six of them have since been taken over by the FDIC, including Greater Atlantic Bank of Reston and Germantown's Waterfield Bank.

Troubles at Harvest came to a head with the fall of the residential mortgage market. The bank purchased 93 mortgages from Countrywide back in 2006, which now constitute more than half of its underwater loans, according to Harvest chief executive John P. Hollerbach. He explained that prior to the acquisition, Harvest primarily focused on increasing its deposits and had a fairly small portfolio of loans, so he welcomed the opportunity to enhance its holdings.

Hollerbach said he only requested loans in the bank's home market in which borrowers had made at least a 20 percent down payment and had credit scores of 700 or better. But, he alleges, "we were essentially sold loans that were not prudently underwritten, and as a result they have gone bad."

Harvest has been locked in a lawsuit with Countrywide, which was taken over by Bank of America two summers ago, since the start of 2009. Bank of America declined to comment because the case, likely to go to trial next year, is still pending.

To date, about a third of the mortgages that Harvest purchased from Countrywide have either been paid off by the borrower or resolved by Bank of America, according to Hollerbach. He does not anticipate a rash of fire sales to reduce any of Harvest's nonperforming assets and is confident that the "collaborative effort with regulators" will help restore the bank's health.

"When you have that much in nonperforming loans, it puts a drain on your available capital," he said. "It's impaired our ability to grow our portfolio, but we expect to be around for a while."

© 2010 The Washington Post Company