K Bank Latest In Area Put Under Fdic Watch

It's Ordered To Stop Giving Builder Loans, Raise Capital

April 25, 2009|By Andrea K. Walker | Andrea K. Walker,andrea.walker@baltsun.com

K Bank in Owings Mills has been placed under heightened federal supervision as it becomes the latest regional bank to suffer from bad loans caused by the collapse of the real estate market.

The Federal Deposit Insurance Corp. issued a "cease and desist" order against the bank, requiring it to stop issuing construction and development loans and raise more capital, among other guidelines. The order was issued March 30 and made public Friday along with similar orders against several other banks around the country.

David H. Wells Jr., president and chief executive of K Bank, said Friday that he and the company's board of directors agreed with everything in the FDIC's order, and they have taken steps to meet the requirements.

He said the bank was caught off guard by the declining real estate market. He added that the bank voluntarily stopped issuing construction and development loans before the order was issued. Wells also said the bank wasn't in danger of closing.

"A core part of our business for the past 48 years has been lending to local developers, and that hasn't gone so well lately," Wells said.

K Bank is the sixth-largest locally based bank in terms of deposits, with eight branches in the Baltimore area. With $680.5 million in assets and $552 million in deposits, K Bank is the latest Baltimore-area financial institution to be placed under federal supervision.

Regulators shut down Suburban Federal Savings Bank of Crofton in late January, Maryland's first bank failure in 17 years, after it failed to make changes ordered by the federal government. The Office of Thrift Supervision also issued "cease and desist" orders to Eastern Savings Bank of Hunt Valley and Baltimore's Bradford Bank in late February. At least a half-dozen banks in the area are operating under heightened scrutiny.

The federal order against the state-chartered K Bank pointed to a number of infractions, including operating with an inadequate loan valuation reserve and a large volume of poor-quality loans. The agency also said the bank operated in a way that produced operating losses and insufficient earnings.

The bank had $17.9 million in charge-offs on bad loans as of Dec. 31, the latest figures available, according to a filing with the FDIC. It posted a fourth-quarter net loss of $16.3 million.

Under the order, K Bank has 120 days to devise a comprehensive business plan that includes goals for reducing problem assets, plans for maintaining adequate liquidity and a determination of the viability of the bank based on market conditions. The bank must also raise its risk-based capital levels to at least 12 percent of its risk-weighted assets. Its current rate is 9 percent as of Dec. 31, according to a regulatory filing.

Wells said the bank began seeing problems with the real estate market in 2007, when it curtailed construction lending significantly. It stopped those loans altogether in 2008.

As people stopped buying houses and values plummeted, many developers couldn't afford to pay their loans. Wells said the bank was hit particularly hard in Prince George's County, where real estate values dropped significantly.

"We saw it getting worse," Wells said. "We didn't see it getting this bad. We're in a very, very different economy."

Wells said the bank has taken several steps since the FDIC order was issued. He said it has reduced construction and development balances by $175 million during the past month. The bank also hired investment firm Sandler O'Neill to help study ways to raise capital, which could include finding investors or selling the entire bank or a branch or two. An outside company was also hired to review the company's loan process.

Banking analyst Bert Ely said it is hard to tell how much of a challenge the bank is facing by looking at its latest available financial figures from Dec. 31. The numbers to be released for the first quarter ended March 31 will be more telling, he said. Ely said the bank had a large number of construction loans, which puts its portfolio at more risk in a weak real estate market.

He said the bank's holding company, K Capital Corp., provided a $9 million infusion to help in the fourth quarter. K Capital Corp. also settled an enforcement action by the Federal Reserve Bank of Richmond.

Despite the troubles that several banks face due to the housing and subprime lending markets, industry leaders point out that the federal government insures most bank deposits of up to $250,000.

And Kathleen Murphy, president of the Maryland Bankers Association, said "the vast majority of banks are well-capitalized." Wells said he expects K Bank to recover with some changes to its business.

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