Problem Real Estate Loans Show Signs of Peaking in Middle Atlantic

The third quarter brought a ray of sunshine to the battered banks of the Middle Atlantic.

For the first time in a year, nonperforming assets declined throughout the region -- the states from New Jersey to Virginia.

The drop, coupled with lower interest rates, was enough to push some troubled institutions back into the black. But more important, it raised hopes that credit-quality problems stemming from the real estate down-turn have peaked.

Turning Point Seen

"We're on the plateau," said Michael Plodwick, an analyst for C.J. Lawrence, Morgan Grenfell in New York.

Nevertheless, economists don't see a rebound before the middle of next year, a sentiment echoed by bankers and borrowers.

"Our customers feel that the market has a ways to go before we work our way out of it," said Leonard W. Quill, president of Wilmington Trust in Wilmington, Del. "We don't see any quick turnaround."

Still, the dropoff in bad loans was a welcome first step. Non-performing assets as a percentage of assets fell to 3.59%, from 3.63%, according to preliminary figures compiled by SNL Securities, Charlottesville, Va.

Increase in Return

That slender improvement helped raise return on assets for the group to 0.48%, up from 0.09% in second quarter and a negative 0.75% in the third quarter last year.

Positive trends were seen regardless of size or financial condition.

At profitable First Fidelity Bancorp, Lawrenceville, N.J., bad assets fell 1%.

At troubled MNC Financial Inc. in Baltimore, they rose by a modest 2.4%, from $1.8 billion in the second quarter.

Declining rates also helped by widening the spread between banks' cost of funding and the interest paid to depositors.

Wider net interest margins especially benefited banks that had addressed loan problems aggressively earlier this year. Richmond-based Signet Banking Corp., which has been building loan loss reserves throughout the year, saw its margin increase from 3.76% to 3.95%.

Others also gained. Margins widened at healthy Dauphin Deposit Trust Co. in Harrisburg, Pa., to 3.98% from 3.94%. Bad assets fell by 2%.

A Slip at Valley National

One exception was Valley National Bancorp, a $2.7 billion-asset company based in Clifton, N.J., that grew rapidly in the 1980s. Its margin sagged by 18 basis points, to 4.75%, as non-performers grew by 14% to $29.7 million.

Middle Atlantic banks also got a breather on deposit rates. Average rates on six-month certificates of deposit were 5.19% on Sept. 25, down from 3.56% three months earlier, according to Bank Rate Monitor.

"Banks have been trying as hard as they can to push those rates down," said Anthony Davis of Wheat, First Butcher & Singer in Richmond, Va.

But some troubled players didn't benefit as much. Midlandtic Bancorp in Edison, N.J., for example, had to pay 5.55% on its six-month CD's -- 31 basis points more than the average.

Preparing for Takeovers

While Midlantic remains the region's weak sister, First Fidelity and CoreStates have emerged as eagles soaring above the turbulent market. Both banks appear to be warming up for an acquisition binge.

First Fidelity bought $325 million in deposits from two failed thrifts during the quarter in federally assisted deals. Other acquisitions are rumored to be pending, including a possible federally assisted acquisition of $4.1 billion-asset Howard Savings Bank, a thrift with severe problems in the middle of the state.

Meanwhile, CoreStates was reported to be poring through the books of Midlantic and United Jersey Banks, Princeton.

After it was reported that CoreStates and another, undisclosed suitor were mulling an offer for the $13 billion-asset UJB, the Chilmark Group, a major shareholder, publicly urged the bank to seek a buyer.

Corestates, Midlantic, and UJB declined to comment.

No Expansion in Region

The region's economy remains weak. Manufacturing and construction has lagged behind the rest of the United States, said Joel Naroff, the senior economist for First Fidelity.

In one indicator of continued economic malaise, employment in New Jersey and southeastern Pennsylvania has dropped 3%, or 100,000 jobs, since last year year.

Vacancy rates in commercial office space were running at 20% throughout New Jersey, southeastern Pennsylvania and Maryland in October. While those rates are better than the average of 30% that plagued Texas in the late 1980s, they are hardly a sign of economic health.

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