MNC Financial Inc. announced today that it has entered into an agreement with federal regulators that gives them a say in the hiring of senior executives and the setting of dividends.
The agreement comes as MNC, the parent company of Maryland National Bank, reported a third-quarter loss of $173 million, or $2.05 a share, as the result of the bank holding company's putting $350 million into its reserves for possible credit losses.
The company also said it is putting its $1 billion credit card operation on the block to shore up its sagging capital situation.
MNC's capital level is hovering near federal minimum requirements for various types of capital.
At a news conference today, Alfred Lerner, MNC chairman and chief executive officer, downplayed the federal regulators' role, saying it is "not nearly as tough as it could have been."
"There are hundreds of regulatory agreements out there. Ours is tough, but not anywhere near where the extreme agreements are," he said. "A bank this size has always had to discuss with the regulators, no matter what condition it is in, its high-level employees," Lerner said. He added that, besides imposing dividend and hiring restrictions, the arrangement is primarily a "reporting-type agreement."
"The facts are that we have made some mistakes and we have not performed the way we should have," Lerner said, "and the regulators are entitled to monitor the ways in which we correct those mistakes."
"Those agreements aren't going to last forever, and one of our jobs is to manage our way out of those agreements," he said.
With assets of $27 billion, MNC is the largest bank holding company in Maryland and the 25th-largest bank in the country. It is the parent of American Security Bank in Washington as well as Maryland National.
"Wow," commented David S. Penn, a bank analyst for Legg Mason Wood Walker, as he reacted to word of the proposed sale of the credit card operation. He said MNC apparently is preparing for the worst and taking steps to strengthen its capital position.
MNC is selling one of its best divisions "so the company survives no matter how bad things get," Penn said. He estimated that the bank will be able to get between $1.2 billion and $1.8 billion for the credit card operation.
The company said the large loan-loss provision, which is about $100 million more than what regulators recommended, "is appropriate in view of the continuing deterioration of real estate markets and the company's plans to deal vigorously with non-performing assets."
Non-performing loans are generally those loans that are more than 90 days past due, property acquired through foreclosure, loans with renegotiated rates, or non-accrual loans.
The $350 million loan loss provision increases the reserve for credit losses to $791 million, or 94 percent coverage of total non-performing loans.
MNC said its total non-performing loans increased 40 percent, from $602 million as of June 30 to $844 million as of Sept. 30. Of that total, $450 million of the non-performing loans are related to commercial real estate.
The increase in non-performing loans compares with a 45 percent increase in the reserve for possible credit losses over the same period. Of the non-performing loans, $297 million was either contractually current or past due by fewer than 90 days as of Sept. 30.
Lerner said he did not have the current capital ratios for Maryland National and American Security nor know whether the banks meet all of the federal requirements, but conceded that they are on the borderline.
MNC had a net income of $68.8 million, or $1.13 per share, during the 1989 third quarter.
This year's third-quarter results increased MNC's nine-month loss to $241.9 million, or $2.91 per share, compared with a net income of $192.9 million, or $2.24 per share, for the same period a year ago.
The credit card operation, called MBNA America and based in Newark, Del., was one of the bright spots in an otherwise dismal financial picture. MBNA America has amassed a high-quality credit card portfolio consisting of more than $6.8 billion in total outstanding credit card loans with one of the lowest credit loss ratios of all major U.S. issuers. It has been a leader in marketing affinity cards, those cards issued to fraternal and trade groups.
MNC said it has engaged its investment bankers to solicit bids for the sale of MBNA America.
MNC is selling the credit card operation because of the continuing decline in real estate markets and the impact of this decline on the loan quality and capital position of Maryland National Bank and American Security Bank, as well as general economic uncertainties.
"In these circumstances, it was determined that the company and its stockholders and customers would be best served by operating at an equity capital level well above current minimum regulatory requirements," the company said.
Because of the decision to sell MBNA America, the bank has canceled an agreement with Lerner to buy up to $180 million of preferred stock. Lerner is the company's largest stockholder, with 8.9 percent of the outstanding shares.
Under the agreement with the Federal Reserve, no dividends may be paid by MNC without prior Fed approval. There must also be approval for material transactions between MNC's subsidiary banks and MNC and its other affiliates and any new personal service contracts with executives of MNC or its subsidiary banks.
The agreement requires MNC to provide reports to the Federal Reserve on asset quality, management, compliance with agreements, and financial results; information regarding personal service contracts; and plans regarding liquidity and capital.
The agreements with the comptroller of the currency require Maryland National Bank and American Security Bank to meet certain capital levels that are in excess of current levels.
The written agreements also require prior approval by the office of the comptroller of the currency for payment of dividends by the two banks. The agreements further require that senior executive appointments be approved by the regulators.