Despite loss, banking firm insists profits will return Growth turns to grief for MNC

THE BALTIMORE EVENING SUN

Though troubles at MNC Financial Inc. triggered government intervention, the head of the bank holding company says federal regulators have not taken over and MNC can return to profitability.

"They are not in the banking business, they are in the regulating business," MNC Chairman and Chief Executive Officer Alfred Lerner said at a news conference yesterday. "If I thought they were running the bank, I would not be sitting here having this meeting. They would be."

MNC, the parent of Maryland National Bank and American Security Bank in Washington, is the largest bank holding company in Maryland and the 25th-largest in the country. It has assets of $27 billion and employs 14,600 people.

Lerner's comments came shortly after MNC announced that it has signed an agreement with federal regulators giving them a say in the hiring of senior executives and the setting of dividends. The agreement also requires MNC to provide reports to regulators on various aspects of bank operations.

MNC also announced a third quarter loss and said it plans to sell its profitable credit card division to strengthen MNC's sagging capital position.

Analysts estimate that the division, MBNA America of Newark, Del., could sell for more than $1 billion.

The quarterly loss of $173 million, or $2.05 a share, compares with net income of $68.8 million, or $1.13 per share, during the 1989 third quarter.

The loss comes as a result of MNC's putting $350 million into its reserves for possible credit losses.

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.

MNC stock dropped 75 cents to close yesterday at $4.12 1/2 a share.

The stock traded at a high of $29.25 on Oct. 5, 1989, the day after it split. On Jan. 18, 1990, when MNC completed its acquisition of Equitable Bancorporation, the stock closed at $21.12 1/2 . The price had dropped to $6.37 1/2 by Sept. 24, when Chairman Alan P. Hoblitzell stepped down and was replaced by Lerner, MNC's largest shareholder and former chairman of Equitable.

MNC's agreement with regulators is not as extensive as those at other banks, Lerner said yesterday.

The regulators' action falls short of a cease-and-desist order, the most serious step the Comptroller of the Currency can take.

Agency spokesman Dean DeBuck said cease-and-desist orders are used "when the problems are more serious, when more immediate action is needed. Also, a cease-and-desist order is enforceable in court when we need to."

Formal agreements and memorandums of understanding are less stringent steps.

In the first six months of this year, the comptroller issued 20 cease-and-desist orders and obtained 60 formal agreements with institutions around the country, DeBuck says.

In August, for example, Shawmut National Corp., headquartered Hartford, Conn. and in Boston, Mass., signed an agreement requiring it to improve its lending practices, credit review, liquidity planning and management information systems, according to the trade newspaper American Banker.

At that time, Shawmut was the third major New England banking company to announce such an agreement. The American Banker quoted analysts as saying that many more banks in the region probably have signed agreements.

Formal agreements are not publicized by the comptroller's office. The law requires the agency to name only institutions subject to cease-and-desist orders.

To the person on the street, the developments at MNC should have no effect, according to state Bank Commissioner Margie H. Muller.

"The deposits in this bank are as good as any other bank in the country," Muller said, pointing out that all deposits are insured up to $100,000 by the Federal Deposit Insurance Corp, which is backed by the full faith and credit of the United States. "If the full faith and credit is not good, then neither is the United States," she said.

The possibility of worried depositors pulling their money out of Maryland National and American Security was raised by a reporter at the press conference.

"I think both of these banks are very strong," Lerner replied. "I think both of these banks can handle whatever the depositors wishes are, whether they are to deposit more or to withdraw some."

While saying he believes in "the inherent strength of this company and its banking subsidiaries," Lerner said every customer has to make his or her own decision.

"Depositors, if they feel confident, should leave their money here, and if they don't feel confident, they shouldn't," he said. "It's our job to make them feel confident."

Lerner said MNC is building confidence by dealing with its problems and strengthening its capital base by selling its credit card division.

Asked if the bank will be taking steps to attract more deposits, such as offering higher interest rates, he said, "We're going to do everything we can afford to do to build as big a deposit base as we can in this market."

Although he said there might be another loss in the fourth quarter, Lerner expects the company to return to profitability next year.

So far this year, the company has declared dividends of 78 cents. The annual dividend in 1989 amounted to $1.055.

The third quarter results increased MNC's nine-month loss to $241.9 million, or $2.91 per share, compared with a net income of $192.2 million, or $2.24 per share, during the first nine months of 1989.

Yesterday's announcements prompted the country's two main rating agencies, Moody's Investors Service and Standard & Poor's Corp., to downgrade the credit rating for MNC and its two banking subsidiaries.

The Moody's action affected about $780 million in securities while Standard & Poor's action applied to $2.1 billion in debt.

Moody's said its action was based "on the further deterioration in MNC's asset quality at the end of the third quarter, which has necessitated a more aggressive restructuring of the organization than had been anticipated."

Moody's said its "review will focus on the successful completion of the restructuring program as well as the outlook for asset quality and earnings of the restructured organization."

Earlier this year, it was reported that MNC is undergoing a restructuring program that could eliminate up to 1,000 jobs.

While Lerner said that there will be fewer people working at the company in the next year, he said he has no figure on how many jobs will be eliminated. "There will be people let go and there will be people hired," Lerner said. "We're going to have the right number of people here."

Standard & Poor's said its downgrading "reflects the continued weakness of the region's real estate markets and MNC's heavy concentration in construction and commercial real estate loans."

"Much of the current deterioration is attributable to the aggressive growth which had taken place in the company's real estate portfolios over the past few years," the rating agency said.

Because of the decision to sell the credit card division, the bank has canceled an agreement with Lerner to buy up to $180 million of preferred stock.

An analyst said the sale of the credit card division is necessary to preserve the rest of the company even though the division is the most profitable portion of MNC.

"I think it was the only solution," said Kyle Prechtl Legg, a bank analyst for Alex. Brown Inc., a Baltimore investment banking firm. "It's their jewel," she said. "But when you are in trouble, you sell your jewels."

The credit card division specializes in affinity cards, which are issued to specific fraternal and trade organizations. In this manner, the bank has been able to ensure that the customers have a high net worth, and the division has one of the lowest credit loss ratios of all major U.S. credit card issuers.

The division normally generates earnings of between $150 million to $160 million, about half of MNC's earnings during good years, bank officials said.

Other MNC subsidiaries include Virginia Federal Savings Bank and MNC Affiliates Group, which has leasing and mortgage operations.

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