Maryland banks are poised to benefit from proximity to the nation's capital, presenting growth opportunities and the potential for strong merger premiums.

The state, which has the highest median household income this year, still has a fair share of community banks. Many of those banks are drawing looks from consolidators that are keen to build scale, particularly in the Washington suburbs.

More banks in Maryland could be open to selling, industry experts say, given higher regulatory costs, persistently low interest rates, and hyper competition.

"Maryland is doing pretty well," says David Bishop, an analyst at Drexel Hamilton. "Banks recognize that if you have strong household income then you've got a well-educated populace that they can benefit from. But it's competitive with the big banks and superregionals having most of the market share."

Maryland is home to a number of affluent communities, including Brookmont, Chevy Chase and Travilah. The state is on track to record the fastest growth in median household income over the next five years, with a compound annual growth rate of 2.32%, according to SNL Financial. Maryland's unemployment rate fell to 5.5% in April, compared to 6.3% nationally.

Total loans at banks based in Maryland rose roughly 6% in the 12 months that ended March 31, or about double the national growth rate, says Kathleen Murphy, president and chief executive of the Maryland Bankers Association.

Much of Maryland's success is driven by the federal government and its contractors, industry sources say. Banks should consider working with government contractors a niche area of lending, says Bert Ely of Ely & Co. These companies are vulnerable to cuts in government spending.

"The Maryland economy has come through the recession relatively well," Ely says. "Broadly speaking, how well banks do in any area is reflective of how the economy is doing in the market they serve."

The rest of Maryland also presents opportunities for banks, given the state's diverse economy, industry experts say. For example, the state's eastern shore has the tourism and poultry industries; Baltimore has a large port that exports coal. The biomedical field is also important, and cybersecurity is growing, Murphy says.

Despite a positive economic outlook, the state's banks face numerous challenges, including intense competition from bigger banks. Very few community banks, in Maryland and elsewhere, are generating strong returns on equity, Ely says.

"How much longer will the stockholders put up with mediocre returns on equity?" Ely says. "Every indication we're getting is that the low interest rate environment will last a few more years. You have subpar earnings in that environment. That is a problem for banks across the country."

Maryland is dominated by large and superregional banks. Nine of the 10 biggest banks in Maryland are based outside of the state, according to the Federal Deposit Insurance Corp. The $4.2 billion-asset Sandy Spring Bancorp (SASR) in Olney is the only Maryland bank to make the list.

Opportunities exist in areas such as home equity and small-business lending, industry experts say. Commercial real estate is also a possibility, especially northwest of Washington where there is a significant number of office parks. Community banks are able to finance smaller projects, Bishop says.

Bankers in need of more fee income should consider offering trust and wealth management services, says Stuart Greenberg, a bank consultant in Baltimore. "Banks have got to increase their commercial lending," he says.

"Some of that can be done through things like increased SBA lending," Greenberg adds. "Some of that is just old fashioned business development with shoe leather on the ground."

Consolidation is another possibility, industry experts say. Prior to the last recession, Maryland saw a fair share of M&A activity, Murphy says.

Maryland, the nation's ninth-smallest state by area, still has 75 banks, based on FDIC data.

"There's not one place in the state that is more than 45 miles from another state," Murphy says. "That makes Maryland very unique and plays into the importance of diversification."

Larger community banks in nearby states are likely to pursue deals in Maryland, while smaller banks in the state are apt to merge with each other to gain scale and improve efficiency, Bishop says.

Such interest was evident in the courtship of OBA Financial Services (OBAF) in Germantown, Md. The $402 million-asset company drew inquiries from four suitors last year before negotiating its sale in April to F.N.B. Corp. (FNB) in Hermitage, Pa., according to a recent regulatory filing.

Charles Weller, OBA's president and chief executive, did not return a call for comment.

"The state is really just too attractive to pass up," Bishop says.

Not all community banks in the state are sitting around waiting for offers from aspiring buyers. Some are actively looking to do deals to increase their operations around Washington.

The $3.8 billion-asset Eagle Bancorp (EGBN) in Bethesda, for instance, is eager to capitalize on the health and size of the Washington area, says Chairman and Chief Executive Ronald Paul. The company agreed earlier this month to buy Virginia Heritage Bank (VGBK) in Tysons Corner to secure a stronger foothold in Fairfax County, Va.

Eagle has less than 2% of the Washington deposit market, leaving it plenty of room to grow and compete, Paul says.

"The Washington metro area is a huge market with high income, high growth and high employment," Paul says. "It makes sense to hunker down and to capitalize on that."

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