Holiday season not so joyous for some banks

Expect a messy finish to an already rotten year in the banking industry.

With just two weeks left in 1990, analysts are beginning to size up the fortunes of the area's banks. The news is not expected to be good.


"Traditionally, the fourth quarter has been a cleanup quarter, and that's especially true -- with an exclamation point -- this year," said David S. Penn, a banking analyst with Legg Mason Inc.

"They are going to try to go into 1991 with a clean slate," he said. "In many cases, it doesn't make sense not to. If they report a good quarter, nobody's going to believe them anyway."


The majority of banks continue to report earnings, albeit reduced earnings, but many of the largest lenders in the region continue to suffer. Analysts worry further what an expected increase in delinquencies among consumer-loan and credit card customers could mean when added to an already crashing commercial real estate market.

Still, buffeted by months of reports about loss after loss at many of the region's banks, some might believe the worst has passed. The secondquarter was bad enough. The third quarter was downright painful for others. Just how many bad real estate loans could be out there? Surely the banks have accounted for them by now, some might contend.

Consider the newest report on MNC Financial Inc.

Written Tuesday and ready for release tomorrow, the Alex. Brown Inc. research analysis expects the troubled banking company to lose even more in the fourth quarter than its whopping$173 million loss in the third quarter. Thatdoes not include any gains that might be recorded from Thursday's announced agreement to sell its equipment-leasing division before the end of the year.

MNC is expected to lose $2.10 a share, or about $180 million, during the fourth quarter as real estate loans continue to fail at an alarming rate, according to the Alex. Brown report. An additional $350 million -- the same amount as in the third quarter -- could be added to its reserves as the level of non-performing assets reaches as high as $1.4 billion.

The results, if proved correct, would bring the year's total loss at MNC to about $430 million, or $5 a share, based on the company's 86.3 million shares outstanding.

"In our opinion, the company's current problems may be survivable," wrote Alex. Brown analyst John A. Heffern, "but the MNC that emerges will have a very different character to its balance sheet and income statement, and profitability improvements will likely be slow to develop."

Accordingly, Alex. Brown has lowered its recommendation on MNC from a "neutral" to an "underperform," otherwise known as a "source of funds." The only lower recommendation is a "sell."


Not all analysts agree with the projections, however. Some are predicting that MNC will come in with a loss of just $1.50 a share, while others, like John A. Bailey at Ferris, Baker Watts in Washington expect the company to break even during the last three months. Mr. Bailey currently has a "buy" recommendation on the banking company's stock.

"My expectation is that this is the quarter in which we see some banks that have had some real estate problems stop having real estate problems," Mr. Bailey said. "So I expect some banks to surprise me with a really good quarter. I don't mean that the real estate market is turning up, but that the write-down process is coming to a close at some of these banks."

It is not difficult to discover that opinions differ.

"I think fourth-quarter earnings are going to look disgusting for ones that have problems and bad for the ones that don't have problems because no one wants to own bank stocks anyway," countered Elisabeth Albert Hayes, a banking analyst with Johnston, Lemon & Co.

Regardless of the assessments, there is little disagreement that some of the banks will have had a rough time during the final three months. While MNC, the parent of Maryland National Bank and American Security Bank in Washington, gets most of the attention as the region's largest banking company, it should have good company if it loses money during the fourth quarter, as expected.

Throughout the region and particularly in the Washington area, the real-estate industry continues to slide, though to what extentand how quickly is difficult to determine.


Some real estate executives and banking analysts said the industry is in an actual "free fall."

Slumping demand and fierce regulatory pressures have led to a virtual freeze on lending to the real estate market, they said. This has led to the failure of many projects that are unable to obtain new funding. Those failures, in turn, lead to bank losses, which leads to even less lending.

This cyclical compounding of the real estate slump is like nothing seen by many in the industry, said Albert L. Ledgard, a professor of real estate finance at Georgetown University's School of Law and an attorney specializing in real estate lending and development.

He calls the current condition an "untypical cyclical recession" that is being driven by more than just supply and demand in the market.

"Since the real estate industry, by definition, is a leveraged industry, as soon as lending freezes up, that takes a good amount of the air out of the bubble," he said. "There are some other components in this that are different [from previous slumps] and therefore it's very hard to assess, measure and predict what's going to come out at the other end."

While analysts agree that losses are coming, they are far from sure where the losses will be.


Some analysts predict C&S;/Sovran Corp., which owns Sovran Bank/Maryland, to earn as much as 81 cents a share for the fourth quarter while others said it could lose up to 50 cents a share. Some expect Signet Banking Corp. to earn as much as 28 cents a share while others expect a loss. Mercantile Bankshares Corp. is expected to be profitable, but again the opinion is split over Baltimore Bancorp, parent of the Bank of Baltimore.

Mr. Bailey expects the company to lose possibly 87 cents a share. Other analysts expect to see a gain.

So far, Crestar Financial Corp., a banking company in Richmond, Va., is the only one that analysts now know for sure.

As one of the first to announce that its fourth quarter would be hurt "in recognition of worsening regional economy and weakening local real estate markets," the company said in an announcement late Friday that it would add $55 million to $65 million to its reserves for possible loan losses. That compares with a similar provision of $19.7 million in the third quarter. From $35 million to $40 million in troubled assets would be written off its books, it said.

Net income for the final three months would be somewhere between a loss of about $5 million to a gain of about $5 million, depending on the size of the provision.

"Our regional economy has clearly moved into a recession, a situation exacerbated by the exodus of military personnel from the Hampton Roads area," said Richard G. Tilghman, Crestar chairman and chief executive officer, in a prepared statement.


"In short, more and more of our customers are feeling the pinch of a deteriorating regional economy and, predictably, so are we," he said.