The nation's economy is starting to recover, but many Maryland banks are still feeling the fallout from the mortgage crisis, and analysts predict that more bank failures and mergers are on the horizon.
About a dozen of the state's 89 banks remain under federal supervision put in place over the last two years, and many others continue to see their loan defaults rise, according to regulatory filings. Some banks don't have adequate capital, and others could be forced to close.
Nationally, the number of bank failures this year is on pace to surpass last year's 140 closures, including several in Maryland. By comparison, only three banks nationwide failed in 2007.
But there are signs that a recovery for banks also could be at hand. Overall bank profits are up across the country, meaning some banks are once again on more stable financial footing, the FDIC recently reported. Lower interest rates have allowed banks to borrow at cheaper costs.
About 93 percent of the state's banks were well-capitalized at the end of the first quarter, making it likely they would be able to cover bad loans, according to the Maryland Bankers Association.
"Banks are still grappling with the collateral damage of a poor economic environment, particularly high levels of high loan defaults among businesses and consumers," said Greg McBride, senior financial analyst with Bankrate.com. But he added: "If your bad loans are under control, it's an environment where you can be profitable."
Among the Maryland banks under pressure is Bay National Bank. Federal regulators have warned the Lutherville institution that it is "critically undercapitalized" and could be taken over by the end of the summer, according to a financial filing this month.
First Mariner Bancorp, the parent of Baltimore's largest independent bank, faces a June 30 deadline to raise as much as $20 million to improve capital levels to satisfy bank regulators.
And Ideal Federal Savings Bank in Baltimore has been ordered by federal regulators to merge with or sell their assets to another company, while K Bank in Owings Mills has been operating under a cease-and-desist order that prohibits it from issuing certain types of loans.
Several Maryland bank executives said they have worked with vulnerable borrowers to restructure loans and make payment arrangements and that they could start to see a rebound soon.
"We are not seeing too many more loans getting in trouble," said A. Bruce Cleveland, chief executive of Presidential Bank in Bethesda. "If the economy holds, I am cautiously optimistic the worst is behind us."
Presidential, which has nine branches in Washington, Virginia and Maryland, entered into a supervisory agreement with the Office of Thrift Supervision this month that required it to come up with a plan to reduce problem loans.
Cleveland said the bank has lowered interest rates on some loans and allowed some borrowers to skip payments until their finances are in better shape. He blamed the loan defaults on a number of factors, including borrowers losing jobs and apartment complexes facing depressed rents and lower profits.
Severn Bank in Anne Arundel County, also under an OTS supervisory agreement to reduce problem loans, said it has worked with customers to slow its default rate. Its losses have narrowed, CEO Alan Hyatt said.
The bank also diversified so it is less dependent on residential loans. And executives decided to stick to making loans closer to home, where they better understand the market. Some of the bank's larger defaults were on loans extended in Delaware and other states.
"We went a little too far from home," Hyatt said. "The further we went from home, the greater the losses."
Some banks are working to lift capital levels.
Bay National reported in a recent filing with the Securities and Exchange Commission that government regulators had classified it as "critically undercapitalized." The Office of the Comptroller of the Currency told the institution that it could be placed in conservatorship or receivership within a few months.
This comes after the Lutherville bank sold an Eastern Shore branch, cut executive pay and tried to find investors to help shore up profits.
Hugh W. Mohler, the bank's chief executive, didn't return calls regarding the possible takeover of the bank. He has said in the past that the bank ran into trouble with small developers renovating homes to sell around Baltimore's Inner Harbor.
First Mariner Bancorp, which runs 1st Mariner Bank, raised $10.9 million through recent stock sales to help stabilize its finances. The bank still plans to raise as much as $10 million, said Dennis Finnegan, executive vice president at 1st Mariner.
Finnegan said the bank is in a better financial position than it was a year ago, and that executives are "encouraged" it will be able to raise more money.
"We are not in a position to say anything stronger than that," he said. "We are pursuing every avenue and have made it our first priority."
Analysts said the shaky job outlook will continue to pose problems for the banking industry, particularly among smaller, community banks. The longer people remain out of work, the greater the chance they won't be able to pay back their debts. The number of Marylanders in danger of losing their homes hit a record 4 percent in the first quarter.
"Even as the economy improves, you'll still have a lot of loans fail," said banking analyst Bert Ely. "It's going to be a bumpy recovery. As long as unemployment remains high, banks will have problems because people can't pay their mortgages loans or credit card bills."
Kathleen M. Murphy, president of the Maryland Bankers Association, said continued delinquencies and other issues facing banks aren't unusual in a recession.
"Banks are a reflection of the communities they serve," Murphy said. "We are continuing to see pressure, particularly on the small-business and commercial real estate sectors. Much of that is driven by consumer spending. It's not surprising that while we're working our way through this recession we are seeing that."
Murphy said that earnings at the state's banks have been under pressure because of the rising cost of federal deposit insurance and higher costs associated with following more than 50 new regulations imposed on banks.
Nonetheless, she believes most of the state's banks are healthy and have the capital to survive more loan defaults. Murphy also pointed out that even those institutions under federal watch have a high probability of making it through the crisis. She said about 87 percent of banks put under supervision eventually become fully solvent again.
The National Bank of Cambridge, the oldest chartered bank in Dorchester County, entered into an agreement with the OCC in April to address bad loans.
In the past month, the bank has hired a new CEO, Kim C. Liddell, to succeed F. Levi Ruark, who had been with the company for 50 years. Liddell said he is in the process of hiring a new executive team to "help the company move forward."
He said he couldn't pinpoint one particular problem that led to the regulatory agreement, which was based on financial information from two years ago. But he said improvement has been and will continue to be made.
"We are working with our regulators to comply with their agreement and welcome working with them to make things better," Liddell said.
Several Maryland banks are operating under "cease and desist" orders, which are stricter than agreements because they order the banks to stop issuing certain types of loans. K Bank in Owings Mills was put under such an order last year. K Bank executives did not return phone calls.
Ideal Federal Savings Bank, a small Baltimore institution with just two employees, has been under cease and desist since August 2008. In March, the OTS gave the bank until May 1 to raise capital by merging with another institution or selling its assets to another bank.
Yvonne Lansey, Ideal's president, has declined to discuss whether the bank had found a buyer or had plans to merge. The OTS has yet to issue more orders regarding the bank.
Analysts predict the shakeout in the industry could last for several more months.
"The economy is improving, but we still have a long road ahead of us," McBride said. "That long road will be littered with more bankruptcies, bank failures and businesses shutting down. As the economy improves, the pace of each of those will diminish."