When Cecil Bancorp issued its last annual report two years ago, its CEO acknowledged the bank's struggle with "problem assets" but emphasized that the parent of Cecil Bank remained well-capitalized.
Two years later, the bad loans and foreclosed real estate continue to mount — accounting for nearly 25 percent of assets as of March 31 — and after losing more money in the first three months of the year, the bank now is considered undercapitalized by bank regulators.
Both the Elkton-based bank and its parent company have been operating under orders from federal and state banking regulators since mid-2010 to develop a plan to maintain adequate capital. Cecil Bank is far from insolvent but faces few options to prevent it from continuing to spiral in that direction, bank experts say. It has lost money every year since 2011, and its bad loans continue to grow.
"My guess is that their losses will continue into this year, unless they really get lucky," said Bert Ely, a banking consultant based in Alexandria, Va. "The big question is: What are they doing to raise capital or find a buyer?"
Since 2012, Cecil Bank and its holding company have been chaired by William Cole IV, a former Baltimore city councilman and current president of the Baltimore Development Corp., a quasi-public agency charged with revitalizing the city. Cole joined the bank's board in 2008, just as the financial crisis and recession struck, crippling banks of all sizes.
The bank acknowledged its problems in its last quarterly earnings filing with the Securities and Exchange Commission, in November 2013. It subsequently de-registered its stock, suspending its reporting requirements to save money.
"Due to our elevated level of problem assets and recurring operating losses, there is substantial doubt about our ability to continue as a going concern," the bank wrote in the SEC filing.
Between January and March this year, Cecil Bank lost $1.39 million, reducing its capital to just under $14.4 million as of March 31, according to its recent quarterly filing with bank regulators.
If capital is exhausted, a bank becomes insolvent, unable to repay depositors, though individual bank deposits in the United States are insured to up to $250,000 by the Federal Deposit Insurance Corp.
Meanwhile, the bank added $17.6 million in so-called nonperforming assets during the quarter, bringing its bad assets to nearly $80 million of its $323 million in assets, or nearly $1 of every $4 it loaned.
The small bank has the second-highest ratio of troubled assets of any bank in the state. A ratio of even 10 percent would be considered high, Ely said, so Cecil Bank's nearly 25 percent ratio is "astoundingly high."
Ely called the bank's troubles "one of the worst I've ever seen."
Cole referred questions to Cecil Bank CEO and President Terrie G. Spiro, but issued a statement saying he had faith in the bank's leadership team.
"Since becoming Chair of the Board of Directors for Cecil Bank I have had the pleasure of hiring and working with Terrie Spiro, the Bank's Chief Executive Officer, and a team of Bank officers and advisors who have many, many years of experience working with community banks," Cole said.
"This very capable and experienced team has brought a high level of leadership and energy to Cecil Bank. They have the undivided support of our board of directors and have worked diligently to address all areas of the Cecil Bank's operations, including the strategic goals contained in Cecil Bank's written agreement with its regulators."
Spiro said she was limited in what she could say about the bank's financial condition because of the regulatory order it's working under. She said bank officials were working "aggressively and comprehensively" to improve the bank's finances, focusing on the troubled loan portfolio.
"The board has been very diligent in taking a comprehensive and holistic view of finding solutions and answers for addressing issues identified in the written agreement," Spiro said. "I think we've made progress on many fronts."
Spiro said Cecil Bank suffered from many of the same problems that hit banks across the country amid the recession, including a large number of foreclosures. She declined to comment on whether the bank was seeking a buyer, saying she was bound by the agreement with regulators.
"These are complex matters," Spiro said. "Banks don't get into trouble overnight, and they certainly don't get out of trouble overnight, so it's a work in progress."
Cecil Bank largely serves Cecil County, an area that has struggled economically because it is cut off from Baltimore by highway toll booths and its short distance from Delaware, a state without sales tax. The county's unemployment rate was 6.5 percent in March, about 1 percentage point higher than the state average.
Shortly after Cole joined the board, Cecil Bancorp accepted an $11.56 million investment from the U.S. Treasury's Troubled Asset Relief Program, which was designed to provide banks with an extra cushion of capital as they worked through bad loans amid the financial crisis.
The investments were meant to be repaid, but regulators forced Cecil Bank to suspend the payments. Cecil is now the program's ninth largest remaining debtor, according to the Treasury's May report on the program to Congress.
Some troubled banks were able to use the investments and the slow economic recovery to right themselves, while others continued to founder and even fail.
Cecil Bank's troubles continued to mount. In 2011, the bank won a $3.04 million judgment against its chairman, Charles Sposato, who owned a hardware store chain in Cecil County, and several of his business partners. The group formed a limited liability company to buy a 150-acre piece of land just outside Elkton with a golf course called Brantwood Golf Course, later renamed Bittersweet Golf Club.
Their 1190 Augustine Herman LLC bought the property in 2006 for $2.66 million. But the loan went into default in 2010, and with interest grew to more than $3 million. In court, Sposato's former business partners turned on him and accused him of dealing in bad faith. The bank foreclosed on the golf course property in 2011. The judgment was vacated in 2012 without an explanation in court records.
Around the same time, 1st Mariner Bank took a 24.9 percent stake in Cecil Bancorp as collateral for a defaulted loan. The only person with such a large stake in Cecil was Sposato, whose stake in the bank declined by the same amount that year. At the time, Baltimore-based 1st Mariner denied interest in acquiring or controlling Cecil Bank, and it did not respond to recent requests for comment.
Sposato resigned in April 2011 after serving as the bank's chairman for the previous 12 years, with that role passing to another director and eventually to Cole. Sposato has since moved to Florida and did not respond to requests for comment.
In late March 2013, Cecil Bank sold its branch in Aberdeen to Howard Bank, with Mary Halsey, then-Cecil Bank CEO, saying it needed to focus on its Cecil County roots. A month later, Cecil Bancorp named Gregg Wagner, a Pennsylvania-based banking consultant and turnaround expert, as president and CEO, while Halsey was named chief operating officer and vice chairman.
Wagner resigned three months later and declined to comment when reached last week. Halsey, who did not respond to a request for comment, then retired in November as the board brought in Spiro as the bank's new CEO. Spiro had a background in helping turn around troubled banks in Florida.
But Cecil Bank's position continued to erode during Spiro's 18-month tenure as its loan troubles mounted. As recently as September 2013, it still was considered well-capitalized by the FDIC, but as losses continued, its so-called risk-based capital ratio fell by the end of 2014 to barely above 8 percent, the threshold between adequately capitalized and undercapitalized. The loss in the recent quarter, coupled with the surge in bad assets, dropped that ratio to 7.05 percent.
Banking experts said that when a bank's capital falls below certain FDIC benchmarks, regulators typically take more severe action. The Maryland Office of the Commissioner of Financial Regulation and the Federal Reserve Bank of Richmond, which oversee the bank, declined to comment.
The two Maryland banks that failed last year, Bel Air-based Slavie Federal Savings Bank and Rising Sun-based NBRS Financial Bank, had capital ratios well below that of Cecil Bank's.
But Cecil Bank's troubled asset ratio of 24.7 percent is higher than that of the two failed banks. NBRS reported a troubled asset ratio of 8.13 percent around the time of its failure, and Slavie reported a troubled-asset ratio of 12.15 percent.
In Maryland, only Hunt Valley-based Eastern Savings Bank has a higher troubled-asset ratio than Cecil Bank's, according to a review of bank data. Eastern Savings Bank's ratio is 33.8 percent, though it is considered well-capitalized by the FDIC.
"Most banks that have faced the problems with nonperforming loans that they have are no longer independently operating entities," said John Boo, a senior portfolio manager with Baltimore-based financial firm Chapin Davis. "They've been seized by the regulators if they've gone through the same sort of nonperforming asset problems that Cecil has. I don't know what's different about Cecil than about some of the other folks that didn't survive."