Saturday, November 19, 2005

FDIC Report for Maryland

FDIC State Profiles

Maryland and Washington, D.C. State Profile - Fall 2005

Maryland’s employment growth rate continued to grow at a robust pace and exceeded the national average.

Maryland’s job growth has accelerated for the past two years, and the second quarter 2005 growth rate ranked ninth highest in the nation. With approximately 100,000 new jobs added since the end of the 2001 recession, statewide employment levels have reached an all-time high (see Chart 1). Strong demographic trends have fueled gains in retailing, education, and entertainment jobs. Housing-related jobs, including construction and mortgage services, also have been important contributors to the state’s economy.

Except for Cumberland, year-over year job growth was widespread across Maryland’s metropolitan areas in second quarter 2005. At just under 3.0 percent, the job growth rate was highest in the Washington D.C. metropolitan area. Job losses in Cumberland primarily reflected weakness in the area’s manufacturing sector.

The recent hurricanes have contributed to higher gas prices in Maryland and may lead to higher heating bills this winter. After sharply increasing following Katrina, gasoline prices have eased in recent weeks. However, the price per gallon in Maryland remained higher than the national average.1 In past years, per capita residential consumption of petroleum in the state has been slightly above the national average.2

Home price appreciation in Maryland and Washington, D.C reached a record high in second quarter 2005.

Strong employment gains, healthy income growth, and low mortgage rates have contributed to robust housing activity in Maryland and Washington, D.C. as home appreciation rates approximated record highs across many housing markets (see Chart 2).3 Sales of existing homes, however, eased during the first half of 2005.

Home prices have increased relative to apartment rents. In Washington, D.C., the average monthly mortgage payment on the median-priced home increased 92 percent during the past five years to $2,577, while apartment rents only increased 2 percent. Monthly mortgage payments relative to rental rates have increased to a lesser degree in Baltimore.4

A favorable employment picture has contributed to strong residential loan quality in Maryland and Washington, D.C. In second quarter 2005, the median past due residential loan ratio was almost one-half the national ratio.

After sharply increasing following the 2001 recession, delinquency rates on subprime mortgages in Maryland have declined and are approaching pre-recession levels, while delinquency rates on prime mortgages remained low (see Chart 3).5 Higher interest rates and seasoning of mortgage portfolios could result in some weakening of credit quality; borrowers with marginal finances could be more vulnerable to repayment stress.

Increased use of innovative mortgage products has helped some borrowers purchase homes that are more expensive. During the first half of 2005, the District of Columbia and Maryland ranked fifth and eleventh, respectively, in the nation in the share of interest-only and option ARM loans (potentially negative amortization loans) in securitized mortgage originations.6 Should interest rates rise, payments on some of these mortgages could escalate. Moreover, should appreciation rates significantly ease, debt owed on some negative amortization loans could exceed the underlying home value.

Reflecting strong demand for housing, C&D loans have increased significantly, particularly among banks located on Maryland’s Eastern Shore (see Chart 4). Home construction has been particularly strong in this area because of a spillover effect from higher priced areas in and around Washington, D.C. and Baltimore and increased demand for second homes. C&D loan quality remained favorable.

Profitability among the state’s insured institutions, as measured by the median return-on-assets, increased slightly in second quarter 2005 compared with one year ago. Net interest margins increased, while loan loss provisions remained at low levels.

After trailing for several years, CDs led deposit growth in second quarter 2005 (see Chart 5). When short-term interest rates were low, as was the case in 2002 and 2003, the incremental income benefit to depositors from locking into a CD was modest. However, as short-term interest rates rose, depositors returned to CDs in lieu of traditionally lower-yielding products such as money market and savings accounts.

The effect on funding costs from increased CD growth varies by institution. For banks with large transactional accounts, growth in CDs may contribute to higher funding costs. Alternatively, some banks may be opting for CDs in lieu of wholesale borrowings to manage funding costs in a rising rate environment. Wholesale borrowing costs (non-core funding) typically are higher than CD costs and are more sensitive to movements in market interest rates.

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