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10 of 21 banks in Md. held to underperform

THE BALTIMORE SUN

Reese F. Cropper Jr. is on vacation.

He deserves one.

For four pressure-packed months during the summer, the bank he runs, Calvin B. Taylor Bankshares on the outskirts of Ocean City, is as mobbed as a snowball stand on the Boardwalk.

"Our transaction volume triples," said William H. Mitchell, the bank's chief financial officer, who runs the company when Cropper takes a breather. "There are constant lines on Mondays and Fridays. I think everybody feels that we are ready for it to slow down [when the vacation season ends]."

The waves of green and silver spent in Ocean City have blessed Calvin B. Taylor. It is one of the top performing publicly traded banking companies in the state, which says a lot.

Although the state's economy has been rolling, 10 of Maryland's 21 publicly traded banks fell below two key national performance standards that analysts and bankers use to measure profitability and productivity, according to data from Danielson Associates Inc., a bank consulting firm in Rockville, and SNL Securities LC, a financial research and publishing firm in Charlottesville, Va.

The weak performance can be blamed on a number factors, including costly expansion programs, bad loans and stiff competition from large, out-of-state banks.

Of the six largest bank holding companies in Maryland, only two are based in the state, Mercantile Bankshares Corp. and Provident Bankshares Corp.

The largest in Maryland is Bank of America Corp., of Charlotte, N.C., which controls nearly $10 billion in deposits here - 14.50 percent of the market.

Like in other states, many of Maryland's biggest banks were acquired in the 1990s. This left Maryland with new, smaller institutions that could make fewer of the lucrative commercial loans of their bigger rivals.

Instead, the smaller banks relied more on making loans tied to real estate and homes, which suffer when interest rates rise, said Arnold Danielson, chairman of Danielson Associates.

In addition, higher interest rates have crimped the mortgage refinancing business, which had helped boost profits at many of these banks. Mutual fund companies and brokerage houses also have siphoned away deposits.

As a result, analysts believe that more Maryland banks risk being acquired. Those at the top of the list include Provident, F&M; Bancorp of Frederick, Columbia Bancorp and Sandy Spring Bancorp, based in Olney.

"It is a very competitive market, and a tough interest rate environment," said Collyn Bement Gilbert, a bank analyst at Ferris, Baker Watts Inc. in Baltimore. "I think there is consolidation still left to take place."

The problems that have hindered many of Maryland's publicly traded banks haven't sidetracked Calvin B. Taylor Bankshares and other high-performers.

Analysts use several measures to gauge bank profitability, but two benchmarks are the return on assets (ROA) and return on equity ratios (ROE).

Return on assets measures how much money a bank makes on its asset base, while return on equity gauges how effectively the banks uses its capital.

Calvin B. Taylor's ROA was 1.85 percent in the 12 months that ended June 30, which means it made $1.85 for every $100 in assets, compared with the national median of $1.09 and the 83-cent median for publicly held Maryland banks.

Its ROE of 10.60, which means it earned $10.60 for every $100 in equity, was on par with Maryland banks' 10.60, but below the national median of 12.69.

That's because the bank has a war chest of capital - more than 18 percent of total assets. Most banks have about 8 percent capital.

"We are profit driven," Mitchell said. "We like to see a little growth [in assets], but we are not real upset if it is not more than 3 or 4 percent."

There are other strong Maryland banks that beat the national averages, including Easton-based Talbot Bancshares, which has $325 million in assets and lends to farmers, doctors and businessmen. It has also helped finance the boom in million-dollar houses on the Eastern Shore.

Competition in Easton is fierce with Talbot going head-to-head against giants like Baltimore-based Allfirst Financial Inc., a subsidiary of Allied Irish Banks PLC of Dublin; Bank of America; and SunTrust Banks Inc. of Atlanta.

Despite the crowd, Talbot has done well, making $1.54 for every $100 in assets and $13.50 for every $100 in equity.

But no public Maryland-based bank matches Mercantile Bankshares Corp.'s performance. It blew away competitors with a return of $2.11 for every $100 in assets, and $16.73 for every $100 in equity.

While other banks have plunged into mutual funds, operate brokerage units and insurance firms, Mercantile has stuck to the basics, analysts said. It takes in deposits, makes loans and cultivates relationships with its customers. Like Calvin B. Taylor, it is awash in capital.

"Capital is the most precious commodity," said H. Furlong Baldwin, chairman and chief executive of Mercantile, which had $8.2 billion in assets as of June 30.

Baldwin said the bank is comfortable with its strategy, but doesn't like to boast.

"I believe ... you don't cry and you don't crow," he said.

But the stellar performers in Maryland are few and far between, observers said.

Five-year-old First Mariner Bancorp has been growing at break-neck speed, spending money opening branches on the theory that its size and reach will one day bring in big profits. But it returned 11 cents for every $100 in assets, and $2.95 for every $100 in capital.

"Our strategy has been to capture market share and market awareness, so we have spent a significant amount of money on our branch expansion and infrastructure development," said Joseph A. Cicero, president of First Mariner. "We expect that as our branches mature, profitability will follow."

While First Mariner fell far short of the benchmarks, Provident's ROA and ROE have slipped this year, although its return on equity remains above the national median.

Danielson gave the Baltimore-based Provident an "A" for effort. The second largest independently owned banking company in Maryland has become more profitable over the years and has expanded its business. But last quarter it stumbled because of problems with $30 million in loans to two nursing home companies.

Provident's second-quarter profit fell 15.9 percent after it set aside $13 million for problem loans.

"The last quarter wasn't so pretty," he said.

Danielson said the 10.60 percent median ROE for publicly traded banks in the state is "a discouraging number." It not only trails the nation, but the returns of neighboring states, including Pennsylvania, which returned 12.79 percent, and Virginia, 11.69 percent.

"It is just getting difficult for people [banks] this size to crank out really good numbers," he said.

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