MNC Financial Inc., the holding company for three of the region's largest banks, announced yesterday that it expects to lose $75 million in the second quarter, the biggest loss yet attributed to the region's weakening commercial real estate market.
The loss by MNC, which is the parent firm of Maryland National Bank, American Security Bank and Equitable Bank, is a significant indicator of the health of the area's real estate market because MNC is the area's biggest financier of real estate development.
MNC is only one of many area financial institutions that are being hurt by overbuilding and high vacancy rates in the commercial office market, and its announcement is the latest in a series of mammoth losses to be reported by local banks and savings and loans. In May, Perpetual Savings Bank, the area's largest S&L, announced a $50 million second-quarter loss.
So severe are the problems that credit-rating agencies have repeatedly issued warnings about the increasing risk of investing in the bonds of area banks and S&Ls. Earlier this week, some of MNC's outstanding debt was declared to be "below investment grade," making its bonds riskier "junk bonds."
"What's happened at MNC really is a function of the marketplace," said Kyle Prechtl Legg, who tracks the company's performance for Alex. Brown & Sons.
Despite the record losses, Legg and other analysts predicted that MNC would rebound in the fourth quarter and could break even for the year.
While many banks and savings and loans have disclosed sizable loan losses under increased pressure from federal regulators -- who have been conducting tough examinations of loans made by area financial institutions -- MNC announced its problems after its own internal review.
An examination of MNC's books by bank regulators is expected in the third quarter. Bank analysts said MNC's disclosure yesterday was influenced by the stiff, new regulatory standards and was intended to minimize the impact of the upcoming review.
"It's always better for you to be managing your own destiny rather than letting a regulatory agency come in and tell you what to do," Legg said.
MNC has long prided itself on being the area's No. 1 real estate lender, bankrolling such premier developers as Conrad Cafritz and Oliver T. Carr, who also sits on the company's board. Last year alone, the bank made $4 billion in real estate loans, with 92 percent of those in the Washington-Baltimore area.
Through its banks -- Maryland National, the largest in that state; American Security, the largest in the District; and Equitable, the third-largest in Maryland -- the company has built up a tremendous portfolio of real estate loans, which accounts for about 30 percent of the company's $18 billion worth of loans outstanding.
But when the balloon in commercial real estate development burst last year, depressing office rents and real estate values, some of MNC's customers began running into trouble. Shortly thereafter, the quality of MNC's real estate assets began to deteriorate, forcing the company to set aside cash to cover potential problems.
Analysts said yesterday they were not surprised by the magnitude of the second-quarter problems at MNC.
"Many people were anticipating this," said David S. Penn, a bank analyst with the brokerage Legg Mason in Baltimore. "One look at what's happened all along the East Coast with banks with large real estate portfolios would tell you this was coming."
Investors also appeared ready for the announcement, with reaction on Wall Street limited to a 25-cent drop in MNC's stock price to $11.37 1/2. However, growing disenchantment with the bank company already had resulted in a 48 percent drop in its stock price since the beginning of the year.
MNC officials declined to comment on the announcement yesterday, saying they would elaborate when second-quarter earnings formally are reported on July 24.
In a statement, MNC said that it expects nonperforming loans -- those that are in default or are no longer current on interest payments -- to more than double in the second quarter, increasing to $750 million from $359 million. The company said $500 million of those nonperforming loans are commercial real estate related.
To cover these potential loan problems, the company said it would boost its cash cushion that protects against losses by $230 million, bringing total reserves to about $550 million.
The company also said its real estate owned -- property that it has been forced to foreclose on -- will increase to about $160 million from $92 million. And it said that write-downs related to those foreclosures are expected to total about $94 million.
While the reserves are simply a bookkeeping transaction in which money is set aside in case doubtful loans go bad in the future, the write-downs mean that the bank already has lost money because the property is no longer worth as much as is due on the loan.
In the first three months of 1990, the company's earnings plummeted, falling 89 percent to $6.2 million because of potential problems in its real estate portfolio. The company said then that it expected further losses in the second quarter. For the first six months of 1990, MNC said it expects to lose $69 million compared with a profit of $124 million in the same period last year.