Merger Prospects Brightening As D.C. Real Estate Stagnates

The dreariest real estate market in the United States could transform the nation's capital into a bright spot for bank mergers.

As of June 30, Washington recorded a higher percentage of noncurrent real estate loans than any of the 50 states, including California.

The D.C. metropolitan area "appears at least a year behind the rest of the country" on the recovery track, said Anthony R. Davis of Wheat, First Securities Inc., Richmond. Even a recent spurt in commercial space leasing by the General Services Administration failed to help the outlook.

MNC's Upturn Likely

The Richmond analyst said he thinks the hobbled MNC Financial Corp. will likely emerge from the downturn and be bought by a "major out-of-market bank" when its survival becomes apparent.

On Monday, shares of the Baltimore bank were available at $4.375, up 12.5 cents on the session. The stock is well above the $1.875 low it hit earlier this year, but still only 38% of its $11.40 book value on Sept. 30.

Besides MNC, Crestar Financial Corp. and Signet Banking Corp., both of Richmond, and Dominion Bankshares Inc., Roanoke, Va., are all strong candidates for some type of combination, according to securities analysts.

"We sense the potential for mergers involving several of these banks will increase over the next year, presenting investors with excellent investment opportunities," Mr. Davis said.

Riggs Raises Questions

Riggs National Corp., the largest banking firm based in Washington, is also plagued by real estate problems. But despite an anemic stock price, the heavy insider ownership makes it harder to assess whether Riggs might be a takeover target.

"The next two quarters will tell us a lot about how Riggs will do," said James H. Weber, banking analyst at Johnston, Lemon & Co., Washington. "At the current prices, somebody could buy a lot of the stock, but [chairman Joe L.] Albritton still owns 35%."

In Virginia, Crestar, Dominion, and Signet probably have three options, Mr. Davis said. "First, make a large |clear-the-decks' loan-loss provision; second, combine with another instate bank; or third, simply attempt to tough it out."

Massive reserving would permit asset sales at market-clearing prices and the banks have sufficient capital to absorb such charges, he said, but they cannot be certain the credit cycle has bottomed.

Riggs has announced plans to pursue this course. It will sell $60 million of repossessed real estate assets this quarter and approximately $194 million over the next 14 months.

Tight Grip on Control

Mergers of equals could significantly reduce combined operating expenses for any two banks. "However, such a combination would obviously entail loss of control for one management team, and none of these three banks' managements is willing to do this -- at least, not today," Mr. Davis said.

Attempting to manage through the cycle could bring near-normal earnings by 1993-94, but meanwhile leave these banks exposed to takeover by superregional banks.

The three North Carolina giants -- First Union Corp. and NCNB Corp. based in Charlotte and Wachovia Corp. based in Winston-Salem -- appear the most likely buyers, he said.

By late next year, Mr. Davis said, the banks may be far enough along in digesting their current acquisitions to "reset their sights on Virginia. We believe each of the banks would be willing to pay 1.5 times adjusted book value for Crestar, Dominion, and Signet."

Crestar Financial sold at $16.375, up 12.5 cents, Signet was unchanged at $17, and Dominion Bankshares traded at $9.875, up 12.5 cents.

Citicorp set a low and most other major banking issues were mixed as the stock market slipped lower on continued investor anxiety about the health of the U.S. economy.

The share price of the nation's largest bank dropped 25 cents to $10 in late trading. Citicorp's previous low ebb was $10.125. Volume was brisk at 1.6 million share near the market close.

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