It should have been a simple deal. Instead, it's become symptom of a bank in crisis.
Crystal Hill Investments was building a three-story, 39,000-square-foot office building in Columbia, expecting a Richmond, Va.-based thrift called Seasons Savings Bank to lease the whole thing. Maryland National Bank thought it would work. It financed the building.
But the deal turned out to be not so simple. The federal government took over Seasons Savings Bank last October, and Crystal Hill Investments couldn't find another tenant. Maryland National took the building back and sold it -- at a loss, one source says, although MNC Financial Inc., parent of Maryland National Bank, won't discuss the case.
Problems caused by the soft Baltimore-Washington real estatmarket forced MNC to add $233 million in the second quarter of this year to the reserves it sets aside for possible loan losses. The extra loan-loss reserves gave the company its biggest-ever quarterly loss, $74.7 million. Last week, those problems prodded Alan P. Hoblitzell Jr., MNC's chief executive officer, to take early retirement at age 59.
The big question now is whether the real estate slump will cost MNC the whole company. Some outsiders say it might, while others insist that MNC's "crisis" has been manufactured by federal regulators insisting on reserves for loans that will eventually be repaid.
"There's no question they're vulnerable," said Felice Gelman, a banking analyst for Dillon, Read & Co. in New York. "The question is what happens to the real estate market."
MNC didn't used to be a big real estate lender. It became one in a four-year, late-1980s rush of expansion and acquisitions that vaulted the state's largest banking company into the ranks of the nation's biggest and most real estate-oriented banking companies.
The decision to push MNC aggressively into real estate lending came from the real estate department, as the company tried to respond to a hot market, Mr. Hoblitzell explained last week. "What we have run is a very decentralized institution, with the decision-making coming up from the bottom," he said.
The push into real estate made good sense when it began, he argued. "Construction lending has been one of the most profitable areas in banking, and particularly in this market," he said.
But critics inside and outside the company say MNC tried to do too much, too fast, and did it too complacently.
MNC concentrated its loans heavily in real estate -- more so than other local banks, according to the banks' annual reports. That is true even though many of MNC's competitors have heavy real estate loan portfolios and have their own problems with loan quality.
MNC is heavily committed to the most speculative type of real estate lending -- land and construction loans. It weakened its credit standards in pursuit of deals, one Maryland National loan officer said, confirming a widespread suspicion.
MNC also concentrated on serving a small number of top-drawer developers -- a decision that looks bad now that some of them are in trouble themselves, analysts say.
"Well, maybe you could say [the portfolio] should have been more diversified, although I'm glad we didn't diversify in New England," Mr. Hoblitzell said. "Some of it is in fairly large amounts to certain developers, and that's a fair argument."
Because it made most of its real estate loans later than its competitors did, critics think MNC got stuck with a large number of what will turn out to be the worst loans.
A construction loan portfolio that barely topped $700 million in 1985 grew to $1.3 billion in 1987 and $2.7 billion by the end of last year. More important, construction lending began to loom larger as a percentage of all lending, increasing to 20.3 percent at the end of 1989 from 9.2 percent in 1985.
By comparison, First Maryland Bancorp, Maryland's second-largest banking company, has about 7 percent of its loans in commercial real estate construction, said Charles W. Cole Jr., the company's president.
MNC has the second-highest exposure to real estate of any major banking company in the nation, according to Thomson Bankwatch Inc. of New York.
Even as the boom crested and ended last year, MNC was expanding its commercial real estate loan portfolio by 46.5 percent -- the second-fastest rate in the nation that year, Thomson reported.
Similarly, an analysis by the investment firm Bear Stearns & Co. showed MNC with the highest proportion of construction loans among 30 regional bank holding companies with assets of more than $5 billion (MNC had $27.5 billion as of June 30.)
"I think it would be absolutely fair to say that we got lulled into a sense of security based on the kind of record we'd had and the strength of the industry in this marketplace," a former senior MNC official conceded.
As latecomer MNC was charging into the real estate fray, other banks were cutting back. Riggs National Bank of Washington reduced its real estate loans by 12 percent last year. Signet Banking Corp., based in Richmond, Va., cut its portfolio in 1988, before allowing modest growth last year.
Neither Riggs nor Signet was shy about making real estate loans, ranking near the top of the list of banks whose loans were most concentrated on construction, according to the Bear Stearns study. But both began to cut back before MNC did.
"In 1987, we decided that the growth in our portfolio and in the market was getting out of whack," said David L. Brantley, senior vice president and treasurer at Signet. "Part of portfolio management is not to have too much bet on any one kind of risk. But there was also a recognition that we didn't want to have too much bet on that market."
Some banks, such as CoreStates Financial Corp. of Philadelphiaavoided the real estate risk by keeping the proportion of construction loans relatively low.
One possible warning came when office vacancy rates in much of suburban Washington rose above 15 percent by the end of 1988. But 1988 was a record year for office leasing in metropolitan Baltimore, according to a February 1989 study by Manekin Corp., which predicted a strong 1989. Instead, suburban Washington's vacancy rates stayed high in 1989 while the Baltimore market weakened.
A senior MNC official, who asked not to be identified, said his company didn't see the end of the boom until the first quarter of last year. It was too late to hit the brakes, he said.
By late 1988, MNC had already agreed to make most of the construction loans it made in 1989. Developers drew on the commitments throughout the year and even into this year -- exposing the company even more to a problem its leaders could see coming.
"It wasn't as easy as you might think" to see when the market was peaking, said an executive at a major Howard County development company, defending MNC. But the executive added that net effective rents for office space had been flat since mid-1988 -- a sign that developers were having a harder time finding tenants.
In its rush to build a bigger real estate loan portfolio, did some of the bank's lending officers throw standard underwriting guidelines out the window? Mr. Hoblitzell says no, but others aren't as sure.
"To infer that people were out cutting [lending] rates and making poor credit judgment, I have trouble with," Mr. Hoblitzell said. But MNC's lending officers became more aggressive, he said.
"Our portfolio reflects this more aggressive lending: more dependence on guarantors, less dependence upon equity in the project, and higher loan to values," Mr. Hoblitzell said.
But an officer currently with MNC disagreed, saying that a review of existing loans in the Baltimore market shows that exceptions to standard lending practices became the rule.
Where policy dictated lending no more than 65 percent of the amount a developer needed to buy undeveloped land -- the riskiest kind of real estate loan -- lenders would raise the limit to 70 percent, he said, then to 75 percent. "Because this guy's a good credit" is how the rationale went.
"You don't lend 100 percent of construction costs to anybody, and it happened," the bank officer said. He hastened to add that almost every lender in town began to relax those standards.
fact, last month the state bank commissioner reported that Maryland's 82 state-chartered banks increased their reserves against loan losses by 132 percent during the first half of the year compared with the same period in 1989. Net income dropped by more than $40 million, to $93.5 million in the first six months of this year.
Some of MNC's loan problems stemmed from the bank holding company's acquisition of American Security Bank in 1987 and Equitable Bancorporation this year, one analyst pointed out.
Active developers were borrowing from every bank in the region, and when three sizable lenders joined, the combined institution was left with a higher exposure to each developer than before.
MNC, like other banks, also has been hurt by a sharp drop in the lending market's ability to provide financing to all comers, caused partly by the retreat of the thrift industry and partly by the economic downturn. That has meant that MNC's borrowers are less able to pay off souring loans by refinancing them elsewhere, Mr. Hoblitzell said.
Johnston & Lemon analyst Elisabeth Albert Hayes pointed out that MNC, like many other banks in the region, also is being hit by federal regulators.
Stung by bank losses in Texas and New England, regulators from the comptroller of the currency are more aggressive in reclassifying loans as low-quality, she said.
MNC is awaiting the results of a continuing comptroller examination, and many expect that the bank will have to take another hit against earnings.
Any hit could further weaken the company's equity position, which already is so weak that it has helped push the company's stock down to $6.25 a share Friday from almost $30 last year.
MNC has the equivalent of about 300 percent of its equity in construction loans, said Tom Barton, an investor in Dallas who has sold MNC's stock short, a move that bets the shares will go down.
"At 300 percent of equity, how much do the properties have to fall before they're wiped out?" Mr. Barton said. "The losses they will take will exceed their net worth," he predicted.
Ms. Gelman of Dillon, Read said Mr. Barton was probably too pessimistic, saying that MNC already has more than $500 million loan-loss reserves.
A senior MNC official said Alfred Lerner, the new chairman and chief executive officer, plans a rapid analysis of the company's real estate loans to determine which ones can be salvaged. The properties backing the loans that aren't viable are likely to be sold quickly to cut MNC's losses, the official said.
In the end, with the past as guide, does Mr. Hoblitzell think he did anything wrong?
"We've got 12,000 employees in this company," he said. "We're spread over an enormous market doing business nationwide. In hindsight you could say, I wish I'd been closer in observing all this.
"On the other side, in an institution of this size, the chief executive can't be responsible for overseeing every loan, and has to depend upon the heads of the operating companies -- each of which is pretty large -- and the lending policies that are being established within those banks.
"This is a fine line."