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.