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As bank failures nationally continue to increase, almost twice as many Maryland banks have been slapped this year by federal regulators with cease-and-desist enforcement orders than last year for inadequate capital levels and other reasons.

Two of those state institutions, K Bank of Randallstown, with eight branches, and Waterfield Bank of Germantown have seen their ratio of total capital to risky assets — a key measure of financial health that regulators closely monitor — decline below adequately capitalized levels in the past year.

The ratio of K Bank, the tenth largest bank headquartered in Maryland with state deposits of $564.8 million, dipped to 5.88 percent in September from 10.98 percent a year ago.

A bank has to maintain a total risk-based capital ratio of at least 10 percent to be considered well-capitalized by the Federal Deposit Insurance Corp. Between 8 percent and 10 percent is adequately capitalized, below 8 percent is undercapitalized and under 6 percent is significantly undercapitalized. If the ratio drops below 6 percent, the FDIC can change that bank's management and force other corrective actions.

In its order to K Bank last spring, the FDIC noted that the institution was operating with inadequate capital "in relation to the kind and quality of assets" and had an "inadequate loan review program."

David Wells Jr., CEO of K Bank, said this week that the bank continues to work to address the order and has taken steps such as hiring an outside investment firm to try to boost capital. Total assets at the bank rose slightly to $658.9 million in September from $649.9 million a year ago, but its net loss for the first nine months this year increased to $24 million from $11.3 million in the same period in 2008.

"We're doing everything we can," Wells said.

Waterfield Bank has seen its ratio of capital to risky assets decline to 7.64 percent from 12.92 percent a year ago. In its order in October, the Office of Thrift Supervision said the bank was operating with an inadequate level of capital protection for the type and quality of assets, and held an excessive level of delinquent loans relative to its capital, earnings and allowance for loan losses.

J. Randall Waterfield, co-chairman and co-CEO of Waterfield Financial Services, the bank's holding company, said in a statement that the institution is "taking immediate action to comply" and has raised a significant amount of capital "pending regulatory approval."

"Waterfield Bank has always been a safe and sound institution," he said. "Like many other banks, we've recently received a regulatory order to increase our Tier 1 leveraged capital ratio to the newly instated level of 8 percent from its existing 5.34 percent ... While we were disappointed to receive the order, we understand that current economic and market conditions have generated new standards, which will ultimately reinforce the level of security and trust required to operate a banking institution."

The order does not affect the security of customers' deposits, Waterfield said.

Five other Maryland banks — Eastern Savings Bank, First Mariner Bank, Bay National Bank and Bradford Bank, all in the Baltimore area, and Colombo Bank in Rockville — received cease-and-desist orders this year from the FDIC, OTS or Office of the Comptroller of the Currency. Last year, four Maryland banks received such enforcement notices.

Bradford failed earlier this year and its deposits were transferred to M&T Bank, as its ratio of capital to risky assets fell below 3 percent. First Mariner, the third largest bank based in Maryland, and Bay National have both seen their ratios near 8 percent. The ratios of Colombo and Eastern remain above 10 percent.

Reflective of economy

The enforcement orders are a reflection of the current economic environment, said bank analyst David G. Danielson, president of Danielson Associates of Bethesda. One reason such orders may appear to be on the rise is that often it takes a year or longer to get out from under them and regulators can issue a new order to the same institution, he said.

But in Maryland, the seven institutions getting cease-and-desist orders this year were different from the four last year.

Danielson said he expects the orders to continue to accumulate until the economy substantially improves. "One of the stipulations is to raise capital," he said. "It takes much longer these days for banks to resolve the issues."

Sometimes banks can avoid a public cease-and-desist order by entering into supervisory agreements with regulators. Severn Bancorp, the Annapolis parent of Severn Savings Bank, did that with the OTS earlier this year. The bank's total risk-based capital ratio was well above 10 percent in September, but the agreement deals with issues such as revising the policy on problem assets.

The failures of Bradford and Suburban Federal Savings Bank in Crofton, which had its deposits bought by Bank of Essex in Virginia, this year were the first for a bank based in Maryland since 1992. Nationally, 125 banks have failed so far this year, five times as many as in all of 2008, according to the FDIC.

Those numbers will likely continue to rise next year, as asset quality will remain problematic, Danielson said.

Kathleen M. Murphy, president and CEO of the Maryland Bankers Association, said she does not comment on individual bank cases. "The regulatory oversight for the banking industry is very rigorous and is designed to identify areas for focus as a means for bringing banks back to health," she said.

Murphy emphasized that 94 percent of the banks in Maryland are well capitalized, the highest designation given by banking regulators. 

"The Maryland banking industry has been through challenging economic times in the past and has stood the test of time," Murphy said.