July 9, 2010 – Bay National Bank, Baltimore, Maryland, became the nation’s 87th banking failure this year and the second banking failure in Maryland this week. Bay National, which had been classified as “critically undercapitalized” by regulators, was closed by the Office of the Comptroller of the Currency, which appointed the FDIC as receiver.
The FDIC entered into an agreement with Bay Bank, FSB, Lutherville, Maryland, to assume all deposits and purchase all assets of failed Bay National. No loss-share transaction was announced by the FDIC on the sale of Bay National’s assets and Bay Bank did not pay the FDIC a premium for Bay National’s deposits.
Bay National had $282.2 million in assets and $276.1 million in deposits at March 31, 2010. The two branches of Bay National will reopen on Monday as branches of Bay Bank. The estimated cost to the FDIC for the failure of Bay National is estimated at $17.4 million.
Bay National’s undercapitalized position was due in part to its inability to convince investors to redeem trust preferred securities that it had issued previously, at a discount to face value. The impaired value of the trust preferred debt eroded Bay National’s capital position.
Trust preferred securities are debt securities issued by banks. During the past decade, regional and small banks issued about $50 billion in trust preferred securities. Prior to the banking crisis, the trust preferred securities appeared to be safe investments since the securities had senior claim positions if the issuing bank failed. These bank issued securities were bundled together and sold as trust preferred collateralized debt obligations (CDO).
The meltdown in the value of these CDOs occurred when earnings of the issuing banks collapsed and the probability of default on the trust preferred securities became likely. Debt rating downgrades on the CDO’s further contributed to a plunge in values.
Late last year, Bay National had filed for approval with the SEC to sell additional stock to raise desperately needed capital. In June, based on lack of investor interest and the inability to redeem the trust preferred securities, Bay National withdrew its filing for a stock offering, thereby sealing its fate with regulators.
Bay National’s stock, which had traded in the $20 range in 2006 closed Friday at 30 cents a share. In 2006, the market value of Bay National was over $40 million. Investors in Bay National now face a complete loss on their investment.