Union Trust Co. of Maryland has built a strong case in support of the theory that a bank can continue to operate a profitable credit card program in the state without charging cardholders annual membership fees.

Maryland's top four commercial banking institutions claimed it couldn't be done and established credit card subsidiaries in Delaware where fees are permissible.

Only a year after persuading the legislature to increase the state's interest ceiling to 24 percent, Maryland's powerful banking lobby celebrated the passage of a stronger deregulation bill last spring. Among other things, the controversial bill allows a financial institution to charge as much as $20 annually for a credit card.

The measure, which became law last spring, was described by banking lobbyists as a jobs bill. The industry contended that Maryland had lost at least 1,000 jobs when banks moved their credit card operations to Delaware. Ironically, one of those banks last week terminated 100 employes in a move that has no bearing on credit card activities.

Banking lobbyists had argued further that without the ability to charge membership fees, Maryland banks couldn't compete favorably with those that had set up subsidiaries in Delaware.

At the time, that seemed to be an empty argument since four of the state's seven biggest banks had opted to shift some operations to Delaware and one of the remaining three didn't issue credit cards anyway. The issue was made even more academic when Baltimore-based Union Trust announced in June that it would not charge a membership fee.

It had begun to look as though all that effort and money that went into lobbying for the right to charge membership fees was for naught. With only a handful of Maryland-based banks still in the credit card business, the power to charge membership fees seemed a moot issue to some observers.

But then, Citizens Bank of Maryland effectively took the banking lobby off the hook last week by announcing that, beginning next month, Citizens will charge an $18 annual membership fee.

Despite selling a sizable part of its credit card portfolio last year, First American Bank of Maryland, in Silver Spring, plans a similar announcement before the end of the year.

Meanwhile, Citizens Bank officials hope to soften the impact of the decision to charge the fee by stressing that no jobs will be lost. Unlike some competitors, a Citizens official said, the Riverdale bank waited for passage of the new law rather than moving credit card operations and jobs out of the state.

For all its patience and professed loyalty to Maryland, Citizens gained little or no business from consumers who refused to pay membership fees to institutions with the Delaware connection.

On the other hand, Citizens isn't losing money on its credit card business, says Senior Vice President Daniel Gillespie. But as operating costs increased, "it became more difficult to support," without imposing a membership fee, explains Gillespie.

Adding the membership fee is only one aspect of a restructured pricing program that Citizens has instituted to increase income from its credit card operation.

"We have seen the profit opportunities diminishing because costs were increasing while our rates were not, and our portfolio had not increased, so it was a question of economics," explained Gillespie.

Faced with similar choices, Union Trust declared in June it would not charge a membership fee for its MasterCard. What's more, "it doesn't seem likely" that it will change that policy "in the foreseeable future," says public relations director Louise Hayman.

"We still feel comfortable with our position," says Hayman. "Business has grown and it has paid to stay" in Maryland.

With a consumer credit operation admittedly too small to justify moving to Delaware, Union Trust decided to increase its share of the credit card business by taking on competitors in an aggressive marketing campaign. In only one year, Union Trust's bank card business has increased 180 percent and its consumer checking business increased 14 percent.

"We worked hard at it and our deposit base has increased sufficiently" to preclude the need for additional credit card fees, Hayman explained.

At some point, consumers will ultimately decide whether Citizens or Union Trust made the right decision. For the present, one would be hard put to find fault with Union Trust's approach.