While being first has its advantages, it is not always something to brag about.
That point was driven home recently as three of the region's largest banks topped a list of banks in the country that appear to be most vulnerable to a softening real estate market, according to figures from Bear, Stearns & Co. in New York.
By leading the nation in their concentration of construction loans, MNC Financial Inc., Riggs National Corp. and Signet Banking Corp. had the dubious honor of capturing more of the most lucrative -- yet risky -- areas of lending than other major
banking companies relative to their total loan portfolio.
Although construction loans can pay off big and in a short time, they are often among the first casualties in any severe real estate slowdown.
"If you look at a bank's loan portfolio," said Kyle Prechtl Legg, a banking analyst with Alex. Brown Inc., "the riskiest element typically in that portfolio ... is commercial real estate, and within that, construction loans are the riskiest."
Baltimore-based MNC, which owns Maryland National Bank and
American Security Bank in Washington, led the list of 38 regional and money center banks with construction loans accounting for 21 percent
of its $16.1 billion in loans outstanding as of June 30.
Washington-based Riggs, which ranked second, had 18.4 percent of its loans in the real estate construction area. Signet, with headquarters in Richmond, Va., came in third with 16.7 percent. Signet Bank/Maryland, the holding company's subsidiary here, said its construction loan portfolio was even higher, with 24 percent of its $2.46 million in loans in that area.
MNC and Signet attributed the still-high concentration of construction lending to loan commitments made as long ago as 1988 that have yet to be concluded. Although new lending in that category has slowed considerably for more than a year, spokesmen at the two banking companies said, fulfilling existing commitments has kept their banks' exposure in that area high.
In addition, analysts said MNC typically bundles and sells most of its credit card receivables, which lowers its total loan portfolio and makes the construction lending portfolio appear to be a larger proportion than it might otherwise. If MNC's more than $5.3 billion in credit card loans were moved out of its loan portfolio, the proportion of construction loans to total loans would fall to about 15.8 percent.
In general, analysts and local bankers, who spoke on condition that they not be identified, faulted the banks for bad timing but defended the allure of construction lending in general.
Typically, construction loans range from about 18 months to three or four years, which includes the time spent building the project and leasing it to tenants.
Though interest rates are usually set about 1 percentage point over the prime rate, the bulk of the bank's profits come from fees generated by the loan, which typically runs in a series of yearlong loan commitments, bank executives said.
Additional fees can stem from letters of credit issued by the bank on behalf of the developer and from extending the loan a number of times.
But with a slumping real estate industry and tenants increasingly hard to come by, the health of many of the construction loans might be in doubt.
MNC, for example, said that the losses associated with charging off construction loans increased to $38 million during its second quarter, compared with losses of $61,000 a year earlier.