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Bank of Essex acquires failed Maryland bank

   The Tapppahannock-based Bank of Essex acquired its second failed financial institution last Friday, according to the press release issued by FDIC on January 30. Its first acquisition of a failed financial institution occurred on November 21, 2008.
   “Suburban Federal Savings Bank, Crofton, Maryland, was closed today by the Office of Swift Supervision and the Federal Deposit Insurance Corporation (FDIC) was named receiver,” the January 30 press release begins.
   “To protect the depositors, the FDIC entered into a purchase and assumption agreement with Bank of Essex, Tappahannock, Virginia, to assume all of the deposits of Suburban Federal.
   “The failed bank’s seven offices will reopen on Saturday as branches of Bank of Essex. Depositors of Suburban Federal will automatically become depositors of Bank of Essex. Deposits will continue to be insured by the FDIC, so there is no need for customers to change their banking relationship to retain their deposit insurance coverage. Customers of both banks should continue to use their existing branches until Bank of Essex can fully integrate the deposit records of Suburban Federal.
   “Over the weekend, depositors of Suburban Federal can access their money by writing checks or using ATM or debit cards. Checks drawn on the bank will continue to be processed. Loan customers should continue to make their payments as usual.
   “As of September 30, 2008, Suburban Federal had total assets of approximately $360 million and total deposits of $302 million. In addition to assuming all of the failed bank’s deposits, Bank of Essex agreed to purchase approximately $348 million in assets at a discount of $45 million. The FDIC will retain the remaining assets for later disposition.
   “The FDIC and the Bank of Essex entered into a loss-share transaction. Bank of Essex will share in the losses on the asset pools covered under the loss-share agreement. The loss-sharing arrangement is expected to maximize returns on the assets covered by keeping them in the private sector. The agreement also is expected to minimize disruptions for loan customers as they will maintain a banking relationship.”
“The FDIC estimates that the cost to the Deposit Insurance Fund will be $126 million. Bank of Essex’s acquisition of all deposits was the ‘least costly’ resolution for the FDIC’s Deposit Insurance Fund compared to alternatives.
   “Suburban Federal is the fifth bank to fail in the nation this year. The last bank to be closed in Maryland was Second National Federal Savings Bank, Salisbury, on December 4, 1992.
   “Congress created the Federal Deposit Insurance Corporation in 1933 to restore public confidence in the nation’s banking system. The FDIC insures deposits at the nation’s 8,384 banks and savings associations and it promotes the safety and soundness of these institutions by identifying, monitoring and addressing risks to which they are exposed. The FDIC receives no federal tax dollars – insured financial institutions fund its operations.”
   An Interned web search of Bank of Essex and FDIC uncovered a similarly styled FDIC press release with the November 21, 2008 date addressing a Bank of Essex acquisition of a failed financial institution on the outskirts of Atlanta, Georgia that had failed.
   “The Community Bank, Loganville, Georgia, was closed today by the Georgia Department of Banking and Finance, and the Federal Deposit Insurance Corporation (FDIC) was named receiver,” the November 2008 FDIC release began.
   “To protect the depositors, the FDIC entered into a purchase and assumption agreement with Bank of Essex, to assume all of the deposits of The Community Bank.
   “The Community Bank’s four branches will open on Monday, November 24, 2008 as Bank of Essex. Depositors of the failed bank will automatically become depositors of Bank of Essex.”
   “As of October 17, 2008, The Community Bank had total assets of $681 million and total deposits of $611.4 million. Bank of Essex purchased approximately $8.4 million of The Community Bank’s assets, and did pay the FDIC a premium of $3.2 million for the right to assume the failed bank’s deposits. The FDIC will retain the remaining assets for later disposition.”
   “The transaction is the least costly resolution option, and the FDIC estimates that the cost to its Deposit Insurance Fund will be between $200 million and $240 million. The Community Bank is the twentieth FDIC-insured institution to be closed nationwide, and the third in Georgia, this year.”
   Congress adopted the economic bailout legislation known as TARP on October 7, 2008. Additional Internet research resulted in more detailed information concerning the two failed Bank of Essex acquisitions.
   For over fifty years Suburban Federal Savings Bank of Crofton, Maryland, specialized in residential lending but the financial institution became critically undercapitalized when the mortgage boom turned sour.
   The result was a capital to risky assets ration of 3.09 percent on September 30, 2008. Adequate capitalization requires that ration to be 8 percent or higher.
   Suburban Federal Savings Bank lost a reported $4.5 million in the third quarter of 2008. Over 11 percent of its loans were noncurrent and on September 30 the establishment had funds to cover only 14 percent of the noncurrent loans. The cited figures were five times the industry average for the third quarter of 2008.
   The Federal Office of Thrift Supervision that closed Suburban Federal Savings Bank last Friday evening faulted that financial institution’s Board of Directors for its failure to appropriately oversee the “aggressive” lending practices that occurred between 2005 and September 2008.
   Mortgage loans were issued without appropriate proof of a borrower’s financial resources and the lending program was extended to residential construction, development and land loans. During 2006 some of those mortgages were becoming toxic. During the third quarter of 2007 the troubled assets resulted in a loss of capital.
    February 2007 OTS examined Suburban Federal Savings Bank and noted a spike in troubled assets. The thrift was subsequently banned from issuing additional loans for residential construction, acquisition and development or land.
An August 2007 examination of the establishment’s books revealed worsening conditions and in March 2008 a public order was issued for the establishment to cease its “unsafe and unsound” real estate lending practices.
    prospective Dutch insurer reportedly considered acquiring Suburban in November 2008, exploring its qualifications for what is known as the TARP Capital Purchase Plan. According to the economic recovery measure adopted by Congress on October 7. 2008, the U.S. Treasury has the standing to purchase stock in banks.
   When Bank of Essex acquired Suburban Federal Savings Bank, a loss-sharing agreement with FDIC requires Bank of Essex to cover only limited losses on the purchased assets. The FDIC will cover any losses suffered by Bank of Essex that exceed the limit whose value may never be released for public dissemination. According to the available information, Suburban Federal Savings Bank engaged in lending practices that will cost the FDIC $126 million and its acquisition by Bank of Essex was the most cost effective remedy.
   The Community Bank in Loganville, Georgia had a similar history. Its seizure last November resulted from falling home prices and a rising incidence of foreclosures as ever more mortgages assumed a toxic character.
   The Bank of Essex is headquartered on Prince Street in Tappahannock. Its Internet website relates the existence of “thirteen convenient locations” in Virginia, along with a statement that Bank of Essex is “building upon a foundation of community bank values.”

Betsy Ficklin

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