The Federal Reserve ordered Elkton-based Cecil Bank to raise its capital to adequate levels or sell itself to another bank in 90 days, a sign that the bank's troubles are worsening.
The so-called prompt corrective action directive, issued this month, said the bank became undercapitalized as of the end of April and did not submit an adequate plan to regulators to restore its capital. If a bank runs out of capital, it becomes insolvent, though individual bank deposits in the United States are insured up to $250,000 by the Federal Deposit Insurance Corp.
The bank, which primarily serves Cecil County in northeastern Maryland, has nine branches and $302 million in assets. In response to its difficulties, the bank has been shrinking, shedding loans and deposits from its balance sheet.
The Federal Reserve order comes as the bank, which has struggled in recent years with high levels of nonperforming loans and foreclosed real estate on its books, has lost nearly $3.2 million this year through June. The losses eroded the bank's capital to $9.3 million as of June 30, according to FDIC filings.
The bank's executives say they are working to comply with the order and recapitalize the bank, and that customers should not notice any difference.
"Our board is very confident in President and CEO Terrie G. Spiro's leadership, and that of her team, and we believe we will be able to meet the requirements" of the Federal Reserve order, William H. Cole IV, the chairman of the bank and its holding company, said in a statement.
Cole is a former Baltimore city councilman and current president of the Baltimore Development Corp., a quasi-public agency that oversees the city's economic development efforts.
"In the meantime, it will be business as usual at our bank and at all of our nine branches," Spiro said in the statement. "Our customers should not notice any meaningful changes in our day-to-day operations. We remain an FDIC-insured institution, and we will continue to work closely with our regulators."
The bank and its parent company have been operating under a separate order from federal and state banking regulators since mid-2010 to develop a plan to maintain adequate capital. The Federal Reserve order does not supersede that order.
The new order, which the Federal Reserve announced last week, directs the bank to raise capital through selling shares or other means, or to sell itself or merge into another bank. The 90-day deadline can be extended at the Federal Reserve's discretion.
The 90-day deadline is not hard and fast, said Bert Ely, a banking consultant based in Alexandria, Va. "A lot depends on what's going on behind the scenes and whether regulators feel management is giving it their best try."
Ely was not surprised by the order, which is typically done for banks that have been in trouble for a while.
"When we look at bank failures, most of the time you see this succession of increasingly strident regulatory orders to shape up," Ely said. "This is getting closer to the end of the road."
The last Maryland bank to fail was Rising Sun-based NBRS Financial Bank, which had capital ratios well below that of Cecil Bank's. State banking regulators closed NBRS in October and sold most of its assets and deposits to Ellicott City-based Howard Bank.
As recently as September 2013, Cecil Bank remained well capitalized according to FDIC standards, but its capital ratios fell to "undercapitalized" levels this year as losses continued to mount.
The bank's ratio of troubled assets to overall assets, which earlier this year was 24.7 percent, considered an extremely high level — dropped in the latest quarter as the bank sold off nearly $15 million in nonperforming loans. Its troubled asset ratio is now about 18 percent.
During the 90-day period, the bank is barred from paying dividends, opening new deposit accounts with interest rates above the norm and must restrict bonus payments to its executive staff.