It is only in recent months that the viability of what have been troubled banks appears to be secure after a couple of tense years when the balance sheets of many banks were shattered by failing commercial real estate loans and subsequent losses. Bank holding companies that appeared mired in red ink now see a brightening light ahead of them.
The non-paying loans are still there, but they're mostly accounted for, and current operations of the banks are profitable. In most cases for the depressed banks, earnings are rather modest, but the very fact that these banks are operating in the black is encouraging to the stock market.
Their relatively small earnings will have an effect on their share prices well beyond the usual price-earnings ratios for the kind of profits the banks will have. A bank stock that would sell at about 10 times earnings when all is well might have a P-E of 15 or 20 during its period of recovery from tough times.
For example, MNC Financial of Baltimore recently reported small earnings for the latest quarter -- amounting to less than 1 cent a share, but the fact that MNC reported any profit from operations was buoyant. MNC's share price rose to a new high for the past 12 months of above 11 after being as low as 1 7/8 just last year.
A strong recovery seems to be under way for Baltimore Bancorp, parent of the Bank of Baltimore, which was also caught in the real estate loan vise as well as in a bitter struggle for control of the bank, won by dissidents.
The share price fell from the mid-teens to under 4.
Not long before, Baltimore Bancorp was considered a prime takeover candidate and a lot of shares had been acquired by persons who thought the company might soon be acquired by another bank holding company.
In the absence of good news, the share price hovered around 5 until earlier this month when Baltimore Bancorp announced a first-quarter profit of $5 million, or about 40 cents per share. Additionally, the bank had reduced its so-called non-performing assets by 5 percent, and management spoke optimistically about continued profitability.
Last week, Baltimore Bancorp's share price shot up by 45 percent, to 8 1/2 and was even stronger early this week until bank stocks in general sold off. Of course, what makes this stock especially attractive is its potential -- annual earnings topped $2 a share in the 1980s.
As banks produce profits and reveal their strengths, there might still be some advantageous combinations such as the union of NCNB and C&S;/Sovran into NationsBank.
There has also been growing strength in the share prices of banks that were relatively little affected by poor real estate loans, such as Baltimore's Mercantile Bankshares Corp. whose all-time high share price accompanies record profits.
Citizens Bancorp of Laurel was only modestly affected by its real estate lending, and the bank has had an earnings decline, but it was not severe, and the share price has rebounded.
In recent weeks, especially, the trading volume of many banks has soared. Conservative banking firms such as Citizens and Mercantile have a history of being traded only lightly, and the current relatively heavy trading is a sign of strong investor interest in banks in general.
As for the troubled banks, management has sobered considerably and is unlikely to repeat the greedy lending policies that got them into deep trouble.
The strongest share price gains will probably come from banks and bank holding companies that are lifting themselves out of what have been extremely difficult times. While such stocks are riskier than normal for banks, the potential gains from these shares are also above normal.