2 local banks' profits up with wider service


First Mariner Bancorp and Sandy Spring Bancorp reported higher first-quarter profits yesterday as the Maryland institutions have joined other banks in expanding beyond traditional services such as deposit-taking and lending to become insurance agents, leasing companies and even landlords.

Both banks reported their biggest gains in so-called non-interest income that includes service fees and other business lines.

Olney-based Sandy Spring, which has acquired a financial planning company and an insurance agency in the past six months, reported its quarterly net income rose 6 percent to $8.3 million, or 56 cents per share, from $7.9 million, or 53 cents per share, a year ago.

Baltimore-based First Mariner, which has expanded its consumer credit division and begun gathering rental income from commercial tenants at its Canton headquarters, reported a 21 percent profit gain to $1.7 million, or 25 cents per share, from $1.4 million, or 22 cents per share, a year ago.

Diversification has shielded some banks from forces that are squeezing profit growth at banks across the country after five consecutive years of record earnings. Banks have been paying more interest for deposits, such as savings accounts, while earning less interest on loans. That led Wachovia Corp., one of the nation's largest banks, to post its slowest quarterly income growth in five years this week.

The Federal Reserve has raised short-term interest rates 15 times in two years while long-term rates, which are determined by the market, haven't risen as quickly. The result has been a flat yield curve.

"The general mood is that the banking sector is not going to be anything close to hot for the near term," said Brian Shullaw, analyst for SNL Financial. "Until the yield curve steepens and normalizes a bit, it's going to be hard for traditional banking companies to grow earnings all that much."

Hunter R. Hollar, president and chief executive at Sandy Spring, said interest income used to account for up to 90 percent of the bank's profits. Today, he said, it accounts for 70 percent. In the last quarter, non-interest income grew three times faster than the traditional banking side.

"We've been on this path for a number of years because we believe that successful independent banks are going to need multiple revenue streams," he said. "It's a much broader strategy than just the current flat-yield environment. The spread on what you earn on loans and what you pay on deposits has been forced downward over the years by more competition."

Other area banks also seemed to benefit from diversification.

M&T Bank Corp., a Buffalo, N.Y., bank with a sizable footprint in Maryland, reported yesterday that its net interest income increased only 1 percent in the first quarter, while non-interest income jumped 8 percent, fueled in part by commercial leasing of rail cars and locomotives, corporate aircraft and other equipment. Overall, the bank earned $203 million, or $1.77 a share, up from $189 million, or $1.62 a share, last year.

Some experts are skeptical. Banks for decades have sought to become financial supermarkets where customers can get multiple financial needs met, and some have recently begun unraveling.

Citigroup Inc., for instance, sold its life insurance business last year to MetLife and exited the asset management business by swapping it for Legg Mason Inc.'s brokerage division. Other banks won't be able to survive unless they can cut costs, according to Adam Dener, a partner at Capco, an adviser to financial services companies.

Dener argues that expenses will soon outstrip revenues at banks for the first time in three decades as they continue to rely more heavily on non-interest businesses, which are more costly to operate. He says that despite advances such as Internet banking, many banks have failed to become more efficient. Branches are as common now as they were in the 1980s and employ roughly the same amount of staff, he said.

"The whole industry decided it needed some level of diversification," Dener said. "The question is: Has anybody made that work?"


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