Banks enjoy good times, but fear loosening of credit standards

January 18, 1998|By Bill Atkinson | Bill Atkinson,SUN STAFF

Times have been so good for bankers that they are beginning to worry.

Profits have sky rocketed, stock prices have soared and the economy has hummed along with barely a bump. Many experts say 1998 could be another banner year for the industry as long as the economy holds up.

But, there is growing concern among bankers that some in the industry have lowered their guard, and in these good times have taken greater risks to book loans and win customers.

"We are seeing a lot of loosening of credit" standards, said H. David Shumpert, president and chief executive of Towson-based Bank of Maryland, the $280 million-asset subsidiary of Mason-Dixon Bancshares Inc. "If we have a hiccup like we did in 1990 and 1991, it could be a bad scene."

Frank P. Bramble, president and chief executive of Baltimore-based First Maryland Bancorp, which has $17.3 billion in assets, said First Maryland loan officers have passed on some transactions because competitors are offering cut-rate loans and are willing to take less collateral or accept customers with weak financials.

"We have walked away from quite a few deals that we thought the ROE [return on equity] hurdles couldn't be met," he said. "Now, we are seeing lower credit structures on some deals and we have refused to participate in that."

Most bankers remember the early 1990s when scores of banks failed and problem real estate loans caused massive losses. Since then, the industry has rebounded in spectacular fashion.

Banks were on track in 1997 to break the record $50 billion they earned in 1996. Final numbers won't be available until the first quarter of this year, but for the first nine months of the year, banks had earned a record $43.9 billion.

Maryland's banks haven't missed out on the money making binge. Both small and large banks have chalked up strong earnings.

Mercantile Bankshares Corp., the largest independently owned banking company in Maryland, with $7.1 billion in assets, led the way with a record $99.3 million in earnings for the first nine months of the year, up 14.1 percent from the same period a year earlier.

US Banker magazine ranked the Baltimore-based company the third best performing bank in the country out of the 100 largest banks. The company has a war chest of capital and the magazine ranked Mercantile No. 1 in capital strength.

The same factors that have helped propel the stock market have helped banks: strong corporate earnings, low inflation, stable interest rates and a healthy economy.

As a result, bank failures have been few and far between. Just one bank failed in the first 11 months of 1997, according to the Federal Deposit Insurance Corp. In 1991 and 1992, when banks struggled with bad real estate loans, 227 banks failed.

Bank profits should be strong this year as long as the economy remains healthy, experts say. Some aren't even that worried about the $223.1 billion in credit card debt on bank balance sheets at the end of September.

"It is very difficult to see what is going to get in the way of the juggernaut that it has got going for them," said Warren G. Heller, research director with Veribanc Inc., a Wakefield, Mass.-based bank ratings service.

Joan T. Goodman, a bank analyst with Chicago-based Pershing, a division of Donaldson Lufkin & Jenrette, said earnings look "very good" for 1998, but she has concerns. Banks are spending millions to revamp their computer systems so they don't have failures in the year 2000. The investment could sap earning in 1997's fourth and subsequent quarters in 1998.

How bad could the damage be?

Winston-Salem-based Wachovia Corp., the country's 20th largest banking company, will take a special charge of $205 million in the fourth quarter of 1997 to retool its systems and dispose of 16,000 desktop computers.

"That is a pretty big hit," Goodman said. "They are just redoing the whole thing which is going to knock out the fourth quarter earnings altogether."

Upgrading computer systems should not distract banks from one of their main strategies -- acquisitions. While the number of deals slowed in 1997, the prices paid were the highest ever.

Last year, 286 banks were acquired with a total value of $73.34 billion. That compares to 357 deals the year before for $35.28 billion, according SNL Securities L.C., a Charlottsville-based research and publishing firm.

"It is a little bit like musical chairs," said Carl W. Stearn, chairman and chief executive of Provident Bankshares Corp., Baltimore's second largest independently owned banking company with $3.7 billion in assets. "Every time the music stops, somebody gets bumped."

Provident, which many analysts expect to eventually be acquired, bought Citizens Savings Bank of Gaithersburg for about $100 million in August. The deal expanded the company into the affluent Montgomery County market and Frederick County.

The biggest deal last year by a Maryland bank came in January when First Maryland Bancorp bought Pennsylvania's fourth largest commercial banking company for $1.36 billion.

Harrisburg-based Dauphin Deposit Corp., added about $6 billion in assets, 98 branches, 92 ATMs and 2,700 employees to First Maryland's holdings.

First Maryland, which is owned by Allied Irish Banks PLC of Dublin, will move about 300 jobs in downtown Baltimore over the next 12 months as it folds Dauphin into the company, Bramble said.

"I feel that we have reshaped our bank with this acquisition, and I feel that we set the stage for ourselves to be a key participant in the mid-Atlantic region," Bramble said. "We think that we accomplished a great deal this year."

Pub Date: 1/18/98

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