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Area's smaller banks show some big muscle


At a banking conference in North Carolina late last year, bankers from across this country and Canada were bemoaning the sorry state of their industry: Low interest rates were squeezing profit margins, problem loans were on the rise and the North American economy was down for the count with no rebound in sight.

Baltimore banker Edwin F. Hale Sr., one of the scheduled speakers, had arrived at the conference with no such complaints. He had already known that this area's community banks were performing well. He came home with the knowledge that they probably are among the nation's strongest.

"It was very telling," said Hale, the chairman and chief executive officer of First Mariner Bancorp, whose bank would later report a record fourth quarter with profit up 32 percent.

Several of the Baltimore area's other small banks have recently made stellar profit reports of their own, including fourth-quarter profit jumps of 70.2 percent at Columbia Bancorp and 45 percent at Sandy Spring Bancorp Inc., and a third-quarter increase of 18 percent at Glen Burnie Bancorp.

By comparison, some of the country's largest institutions had mixed results. Bank of America Corp., the third-largest U.S. bank, enjoyed a fourth-quarter earnings jump of 27 percent. But Citigroup, the world's largest financial services company, said earnings fell 37 percent.

Many of the smaller banks in the Baltimore-Washington region were started in the late 1980s and early 1990s after a flurry of takeovers transferred control of the area's largest commercial banks to out-of-state owners.

The community-bank movement - encompassing more than a dozen local institutions - has wrested back some of that control, forcing out-of-town banks to compete for business and helping local businesses by serving niches that had either been ignored, or poorly served, banking experts say.

The bottom line: Many of the Baltimore region's community banks are outperforming their peer group nationwide, according to experts.

"Maryland's community banks have done much better than banks elsewhere because of the [stronger] economic environment in the Baltimore-Washington corridor," said Collyn Bement Gilbert, a vice president and banking analyst with the Conshohocken, Pa., office of Ryan Beck & Co.

Community banks are dwarfed by such giants as Bank of America, which has $660 billion in assets. There is some debate about how big an institution can be before it's no longer considered a community bank. Many analysts draw the line at $1 billion in assets; others characterize banks in the $1 billion to $10 billion range as "super-community banks," arguing that a even few years of decent growth can push an institution through that $1 billion ceiling.

The Baltimore region has a full menu of locally controlled banks. Among the public companies: Mercantile Bankshares Corp. ($10 billion in assets), Provident Bankshares Corp. ($4.9 billion), Sandy Spring ($2.29 billion), Columbia ($982 million), First Mariner ($869.3 million) and Glen Burnie ($282.5 million). Bay National ($74 million), a Lutherville-based startup, is privately held.

Community banks are often started by bankers who had formerly worked for larger institutions in the same area, and then either retired, or were forced out during the rounds of cost-cutting emblematic of larger banks, said Gilbert.

These executives know their markets well, have a plethora of contacts, and often know their potential clients personally. Loan decisions are made locally - and not by an executive in some distant headquarters city, said Hugh W. Mohler, chairman and chief executive of Bay National, which was launched in 2000.

A year ago, when Marc W. Ottinger, 45, decided to buy Baltimore Packaging LLC, he considered only local community banks as he shopped for financing. Ultimately, he did the deal with Bay National early last year. "It's been my experience that [as a small company] ... when you work with a big bank, you get an account executive who's some kid just out of college, who has never made any real business decisions, and has no real business experience," said Ottinger, who has spent part of his career working as a business turnaround specialist. "I didn't need that."

Ottinger knew that at a community bank he would very likely be paired up with someone who had real-world business experience. The account executive at Bay National had once operated a moving company, giving him intimate knowledge of some of Baltimore Packagings key elements, Ottinger said.

Recent statistics underscore that well-run niche banks can be extremely profitable: In the third quarter, the most recent full set of figures available, the 72 commercial banks operating in Maryland enjoyed a return on equity of 12.5 percent. That was more than a percentage point better than the national average of 11.48 percent for comparable institutions, according to the American Bankers Association in Washington.

"The return on equity of 12.5 percent is an excellent result [and good news] for investors, since it means banks here are strongly capitalized," said Mary Louise Preis, Maryland's commissioner of financial regulation. "These are good numbers for investors and borrowers."

Stock prices underscore that the smallest banks have been the stellar performers since the start of last year: Glen Burnie shares are up 33 percent, First Mariner up 11 percent and Sandy Spring up 3 percent.

During that same period, the Nasdaq Bank Index and the Standard & Poor's SmallCap Banks Index are each up 4 percent, while the S&P; 500 Diversified Financial Services Index is down 23 percent and the S&P; 500 stock index is down 25 percent.

Among Maryland's mid-size banks, Provident shares are down 4 percent and Mercantile shares have fallen 12 percent.

Among bigger banks, Bank of America shares are up 11 percent, but Citigroup shares have dropped 24 percent.

Bank executives and economists say the strong performance of the region's smaller banks is the result of two trends working in tandem: A state economy that for now seems stronger than it is elsewhere, and the success of the community bank concept.

"Maryland is outperforming the national economy," said Anirban Basu, director of applied economics and the senior economist for RESI Research & Consulting, Towson University's economics research arm. "Community banks are becoming the banking model because they are all about focus. The large banks are dealing with a lot of issues [such as rising bad loans]. Not so the small community banks."

By continuing to deliver strong service, community banks are keeping existing customers, said Gilbert, the Ryan Beck analyst.

"What we're seeing is the result of banks being loyal to their customers," she said, "and the customers being loyal to the banks."

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