In suffering its $173.4 million loss in the third quarter, MNC Financial Inc. got hit primarily by a dramatic increase in bad loans at its American Security Bank as a disproportionately large loss was recorded by the Washington banking subsidiary.
American Security -- less than half the size of its Baltimore sister, Maryland National Bank -- lost $178.5 million during the third quarter compared with a loss of $103.2 million at Maryland National, according to regulatory reports filed yesterday.
Despite its smaller size, MNC's Washington banking subsidiary said it had surpassed Maryland National in the amount of troubled real estate loans on its books.
Yesterday's filings, which had been delayed two weeks after the banks received an extension from federal banking regulators, provided the first glimpse of the two banks' financial conditions since a federal regulatory examination was concluded nearly two months ago.
The release of the individual banks' filings came as further evidence and clarification of the sort of quarter MNC just suffered. Neither MNC's quarterly filing with the Securities and Exchange Commission, which also came yesterday, nor the company's earlier release regarding its third-quarter loss included specific financial information on its two large banking subsidiaries.
The two banks' losses were partially offset by profits at MNC's credit card subsidiary and other factors.
While the two banking subsidiaries added more than $328.5 million into reserves during the quarter to protect against future loan-related losses, more than half occurred at the smaller American Security.
According to the reports, American Security, with $5.9 billion in assets Sept. 30, added $167 million to its loan-loss reserves during the third quarter, nearly double the $86.5 million it added during the first six months of the year. The bank said troubled real estate loans increased by nearly two-thirds to $270.5 million from $164.6 million during the third quarter.
Maryland National, with $15 billion in assets, took a provision of $161.5 million during the quarter as its troubled real estate loans increased 32.5 percent, to $265.8 million. Any addition to a bank's loan loss reserves is deducted from operating earnings.
Analysts said that given the dramatic weakening of the real estate market primarily in the Washington area, they were not surprised to see a large loss at MNC's Washington bank.
"I think it was pretty well known that American Security has a pretty big percentage of the hole," said Kyle Prechtl Legg, a banking analyst with Alex. Brown Inc. in Baltimore. "Our particular market is deteriorating very, very rapidly."
A further squeeze on MNC's profits came as the company moved to bolster its deposits by turning to professional brokers across the country. To attract the out-of-state deposits within the competitive industry, banks must offer higher rates of return, which, in turn, decreases the income that can be realized on that money.
MNC said it that, while its total deposits increased $4.2 billion since that start of the year, the majority of that came in the form of these purchased deposits, which were up more than $2 billion during the third quarter.
Brokered, or purchased, deposits are often considered to have a greater risk attached to them because they can quickly disappear if rates are not kept sufficiently high.
The company is currently seeking approval to continue its brokered deposit program, MNC said.
The push for liquidity at MNC also remained evident in yesterday's filings. In announcing its third-quarter loss last month, MNC said it would sell its prized credit card division, MBNA America Bank, along with four other subsidiaries.
The need for a relatively quick completion of those sales was borne out by the company's disclosure yesterday that "substantially all" the holders of $823 million in MNC debt have told the company they do not plan to renew the debt in coming months. About $170 million is due in December, and $586 million in debt matures during the first quarter, the company said.