“The primary causes of Bay’s failure were its aggressive growth strategy, excessive concentrations in higher-risk construction and development loans, and insufficient capital relative to the risk level of its loans. These conditions were exacerbated by the downturn in residential real estate values in Maryland, Bay’s market. In addition, risk management activities at Bay were inadequate. For example, liberal underwriting standards allowed originations of loans without proper analysis of the borrowers’ stated income or their ability to sustain a project should it be delayed. Bay’s asset quality began deteriorating in late 2007, resulting in significant increases in its problem assets and loan losses. In turn, these loan losses significantly diminished earnings and capital and, ultimately, led to Bay’s failure.”
The audit, undertaken in August and September, determined there were “no unusual circumstances” surrounding the bank failure. Therefore, auditors recommended that no further review of the bank’s failure be undertaken.
The cost to the FDIC’s Deposit Insurance Fund for the Bay National closure was $17.4 million. The FDIC closed the bank on July 9 and Bay National’s deposits were assumed by the newly formed Bay Bank FSB.