What's in store for Maryland's banking industry?
That's a question banking experts will be attempting to answer in coming months as they pore over quarterly financial reports.
Earnings and non-performing assets of some institutions have shown unsettling trends over the last six months or so. It's not clear if regional banks are merely hiccuping as they digest bad real estate loans, or if the quarterly results are harbingers of the kinds of banking troubles that hit the Southwest and are plaguing New England.
An added difficulty is a weak Middle Atlantic economy that's teetering on the brink of a recession, as indicated in a recent survey of the 12 Federal Reserve regional banks.
Those factors notwithstanding, it would be inaccurate to characterize this region's banking picture as one of overwhelming gloom and doom.
The situation looks quite promising for firms such as Citizens Bank of Maryland, which managed to avoid some of the riskier deals that accompanied the real estate boom. Although Citizens experienced a slight drop in earnings for its second quarter, it's in good shape and looking to gain market share at the expense of faltering competitors. The outlook is particularly bright for banks like Mercantile Bankshares Corp., which had a second-quarter earnings increase.
The flip side is represented by regional giant MNC Financial Inc., where a sour commercial real estate portfolio and a sluggish economy have combined to devastate earnings and create multimillion-dollar losses. The bottom end of the spectrum is represented by the National Bank of Washington, an institution that filed for bankruptcy this year after being felled by mismanagement and bad real estate loans.
"Maryland, as in many other states, has had a decline in bank earnings the first half of 1990," said State Bank Commissioner Margie Muller. "We're talking about a few banks that have had losses and a great many banks that have continued to have earnings. It says that banks aren't making as much money as they did in earlier years and a lot of them are having to tighten their belts."
Banks typically experience a downturn in earnings when they spend more than they make, or have to provide for loan losses, Ms. Muller said. The upshot is that many of the state's 108 independent banks are cutting back on expenses and enforcing much tougher lending criteria as they operate in an uncertain market, she said.
"It may take a number of quarters before we see any return to earnings growth," Ms. Muller said. "But if banks are prepared properly for weak markets, as in any business, they will reach the bottom of the cycle and start up the other side."
In the meantime, results have been mixed as regional banks ride out the downturn, said an analyst with an area bank consulting firm.
"There are some banks in this area that have come through this very cleanly," said the analyst, who asked not to be identified for fear of offending potential clients. "Maybe we need to see a couple or more quarters to see how things unfold. I would rate MNC as being a very risky institution right now -- I wouldn't say that they're on my list of institutions that I expect to fail."
He said soft earnings and increases in non-performing assets being generated by some banks are a cause for concern.
"My sense is that there are some problems that are starting to emerge . . . and how severe those problems get, we'll just have to wait and see. It's too early in the game to say this is another New England waiting to happen or another Texas waiting to happen."
Ross Waldrop, a financial analyst with the Federal Deposit Insurance Corp., held the same view. While the banking problems in the Southwest and the Northeast started in a manner similar to those being experienced in Maryland, "that doesn't necessarily mean that every region that shows a deteriorating trend over the short term is going to see it continued for as long, or to the degree that we have seen in the Southwest or New England," he said.
At the end of the first quarter of 1990, the percentage of Maryland real estate loans that were either 90 days delinquent or more and, or, not accruing interest, was .99 percent, Mr. Waldrop said. That number more than doubled in three months, moving to zTC 2.06 percent by the end of the second quarter, which ended June 30.
The severity of the state's banking problems will hinge on two things, Mr. Waldrop said: Whether or not most of the bad real estate loans in Maryland were highly speculative in nature, and the extent to which overbuilding took place. If both were excessive, the state's banking industry will be in for a prolonged rough spell, Mr. Waldrop said.
Before the current downturn set in, the state's banking industry had been actively involved in a big push toward regionalization and acquisitions, but it seems that has cooled somewhat, according to Ms. Muller.