Some banks buck the trend


Bank stocks have suffered through the last couple of years as poor real estate loans became visible and earnings tumbled. This has been a time of banks merging out of necessity, and in other cases, of hanging on with difficulty.

Most of the troubles in the banking industry are known. In some cases, though, the severity of the problems could become even greater, such as deepening losses on real estate loans. In general, though, the troubles are spread before us.

The question in the minds of investors is whether bank shares have suffered the worst or, are they at the bottom and ready to go up.

It appears that many bank stocks are at their worst, but it also seems as if there isn't any strength to push up the share prices of the problem banks. The mid-Atlantic, New England and West Coast regions have been most severely affected.

A lengthy improvement in the economy may be necessary for a turnaround in the performance of the banks and their shares.

In normal times, bank stocks might sell for about 10 times annual earnings. In recent years concern about the banking industry has reduced the price-earnings ratio for a lot of banks to a point or two under 10. If a company is earning $3 a share, the typical share price might be $24 to $30. That is not true of many banks currently because of the aberrations in earnings caused by real estate loan problems.

For example, if a bank normally earns $2 a share and sells for 18, it isn't reasonable to expect it to sell for just 2 if earnings dip to 20 cents. The longer-term earnings potential has to be considered, and while the price can be expected to fall well under $18, it should not become decimated.

Baltimore-based MNC Financial, parent company of Maryland National Bank and American Security Bank, had strong earnings in the 1980s, bringing in nearly $3 a share annually until the real estate debacle caused a loss of more than $5 a share in 1990. MNC's share price plummeted from the upper- and mid-20s to as low as 1 7/8 early this year. At that point, there was serious concern over MNC's viability. The price has settled in currently at about 5. MNC has no current earnings and it may not show a profit for years. The share price reflects the present, but also some potential recovery.

The share price of Baltimore Bancorp, parent of the Bank of Baltimore, has dropped but more moderately, from 15 to about 8 in the wake of a decline in earnings but also a merger rejection and a struggle over control of the company. Takeover bids and battles for control tend to add buoyancy to a share price. The 60-cent-a-share dividend has been cut to a rate of 36 cents. Meanwhile, the P-E currently is nearly 30 instead of the typical 8 or 10, simply because the share price has remained relatively strong.

It is reassuring to investors to see bank stocks with consistently solid earnings and selling at normal price-earnings ratios.

A good example is Mercantile Bankshares Corp. of Baltimore, Maryland's first bank holding company and parent of the Mercantile-Safe Deposit and Trust Co. The company's earnings have ranged from $1.80 to $2.40 a share over the last four years -- they were $2.32 in 1990 -- and the dividend has edged up. The stock, priced at about 24 this week, is selling for just over 10 times earnings. It's practically a throwback to the old days.

Laurel is the home base of Citizens Bancorp of Maryland, whose P-E ratio is between 11 and 12 based on a share price of 19 to 20.

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