MNC'S FALL FROM GRACE Risky loans eroded Hoblitzell's dream

THE BALTIMORE SUN

For a while, Alan Penniman Hoblitzell Jr. saw the future earlier and clearer than most.

As tumultuous changes loomed in the banking industry during the 1980s, he foresaw only two roles for mid-sized banks like his Maryland National. Swallow or be swallowed.

Mr. Hoblitzell never wavered.

He had spent his entire career at the bank, rising from trainee to chairman. To the outside world, he had become indistinguishable from Maryland National. He had nurtured it as it became Maryland's dominant bank and one of the region's most visible civic leaders. He wasn't about to stand by now and watch the big boys from outside sweep in and gobble up his bank. Maryland National, he was determined, would survive.

He succeeded. But in his success he had sowed his failure.

After 34 years with the bank, Mr. Hoblitzell is no longer its chairman. Many of his top executives are gone. Others have been pushed aside. And hundreds of lower-level employees may lose their jobs.

His company, staggered by a deteriorating real estate market, has reported its largest losses ever. MNC Financial Inc., parent of Maryland National, has seen its stock plunge in a yearlong free fall, forcing the corporation to put parts of its empire up for sale, including its most profitable divisions.

The hometown company, never before dominated by a single investor, is headed by its biggest shareholder, a blunt and savvy out-of-state businessman. And suddenly, a corporation determined to control its fate is now in the embarrassing position of needing federal regulators to approve once-routine company decisions.

Only a year ago, analysts were trumpeting MNC as one of the best-managed regional banking companies in the United States, jewel in a slumping industry.

NB That high praise is now remembered wistfully not only by those

who had invested their careers at Maryland National but by some of Maryland's business executives who valued having a banking giant rooted in Maryland.

"What we celebrated a year ago was that we had a shot at owning our own huge bank," said Robert Keller, executive director of the Greater Baltimore Committee, an organization representing the largest businesses in the metropolitan area.

As this year dawned, Mr. Hoblitzell seemed to have realized his goal of enlarging Maryland National to make it indigestible to outside banks.

But there was a fatal flaw in the bank's tactics. Mr. Hoblitzell had built the bank's growth on a foundation precariously weighted toward real estate investment. The imbalance left MNC particularly vulnerable to a collapse in the real estate market at a time when federal regulators were fiercely resolved to tightly rein in the banking industry.

When the reverberations from his failure became evident, the 59-year-old chief executive last month did what would have been unthinkable as the summer began. He left.

Mr. Hoblitzell, who received $1.2 million in severance and a $465,000-a-year pension, said he recognized that his hands-off management style could not heal his ailing company.

"I felt that the institution would thrive and do better with somebody else," he said.

That somebody else is Alfred Lerner, a one-time furniture salesman from Cleveland whose investments in real estate and stock made him a millionaire many times over. Although MNC directors once barred him from buying any company stock, they turned to him as their best hope for a turnaround.

Last week, the new chairman signaled how his rescue operation would proceed: Mr. Hoblitzell's far-flung, diversified corporation would have to be dismantled.

The Grand Design

If MNC executives came to take success for granted, it was hard to blame them. Since Mr. Hoblitzell had become its $H chairman in 1984, the corporation enjoyed a seemingly unending series of triumphs. Profits rose. Dividends increased. Market share grew.

"If you're doing better every year you get on a roll. It's hard to change your optimism into pessimism," said Mary Frances Wagley, a Maryland National Bank director.

She was one of more than two dozen MNC executives and directors and Baltimore business leaders interviewed for this article. Many of them spoke only on condition of anonymity, saying MNC told its employees and advised directors not to speak to reporters. Several former employees cited fears of losing severance pay if their names appeared in the press.

Mr. Hoblitzell seemed a perfect match for a company on the rise. Imaginative and aggressive, he determined the company's ultimate destination but left his deputies to chart the course.

The son of a USF&G; executive, educated at Gilman and Princeton, Mr. Hoblitzell was regarded as an affable if distant employer, who disliked confrontation, according to several top executives.

He also firmly believed a locally controlled bank would be more attentive to Maryland than a banking giant run from Chicago or Richmond.

To the larger community in Baltimore, Mr. Hoblitzell, wavy-haired and ruddy-faced, was a perennial civic champion. If he wasn't chairing the United Way or a governor's panel on higher education, he was sitting on a GBC committee promoting minority business ownership. He insisted that his corporation take a prominent role in charitable causes.

If MNC was Mr. Hoblitzell's career, however, it was not his obsession.

Increasingly, several MNC executives and Baltimore business leaders said, he jealously guarded his time with his second family, which included two young children, born after he had reached his 50s. His aversion to working nights was common knowledge within the company. On weekends, he often jetted to a home on Nantucket, Mass.

As deregulation arrived and interstate banking loomed in the 1980s, Mr. Hoblitzell's strategy unfolded. His goals, outlined in the company's annual reports, were threefold: to consolidate Maryland National's dominance in Maryland, to establish MNC as the premier banking company between Philadelphia and Richmond, and to grow bigger in selected national markets.

He moved aggressively on all fronts. In 1987, he merged Maryland National with American Security, the second-largest bank in Washington. In 1988, he acquired the Richmond-based Virginia Federal Savings Bank and the Atlantic Coast Mortgage Co. of Arlington, Va. He also took over Landmark Financial Services Inc., which made consumer loans from Virginia to Florida.

Looking north, Mr. Hoblitzell established a beachhead in Pennsylvania by opening consumer finance offices. And in Delaware, he vastly improved the performance of MNC's credit-card division. By penetrating such markets as California and Texas, the division became the nation's fourth-largest issuer of bank credit cards. By last year, the division provided one-third of MNC's earnings.

Last year, he trained his sights on his biggest prize. He forged a consolidation with Maryland's third-biggest banking company, Equitable Bancorporation.

Combining the two rivals saved millions of dollars in operations and gave Maryland National a much greater market share, especially among medium-sized commercial borrowers. The result was a bank with more than 200 branches and a seemingly unshakable grasp on Maryland's top banking spot.

By the end of last year, Maryland National did business with one in three Maryland households and held 23 cents of every dollar deposited in Maryland, more than twice as much as its nearest competitor.

The Equitable merger also ushered Alfred Lerner into MNC. The consolidation gave Mr. Lerner, chairman of Equitable, an 8.9 percent stake in the corporation, making him by far its biggest shareholder.

His history included surprise attacks on banks. In 1981, he seized a 27 percent stake in Equitable, prompting the company to sue. Later, he quietly acquired nearly 10 percent of AmeriTrust Corp., an Ohio bank, prompting another lawsuit.

He backed off when the bank bought his stock, collecting a $30 million profit, according to newspaper reports.

In becoming an MNC director and consultant, Mr. Lerner received a monthly salary of $45,000 and use of Equitable's corporate jet. But MNC's directors, wary of Mr. Lerner's acquisitive past, had a condition: They made him promise not to purchase any more company stock.

Bulking up

Mr. Hoblitzell recognized that the mergers were not enough to ensure independence. For that, the company needed more and more profits. Commercial real estate became the key to "bulking up."

Thanks to the guaranteed presence of the federal government and its army of workers, several top company officials say they believed the real estate market in Maryland was a balloon that could not burst. They were like the Texas bankers who thought the price of oil would never fall, but "our version of $40 oil is that the Washington-Baltimore corridor is recession-proof," said one former MNC executive.

By the late 1980s, loans to commercial developers had become far riskier. Competition and the drive for profits led MNC to relax its loan standards, several company officials say.

Mr. Hoblitzell has acknowledged that the bank's lenders were financing greater portions of development projects, putting more bank money at risk. Several MNC executives say they felt safe, though, because of MNC's virtually unblemished record of real estate lending and adherence to banking's golden rule: Keep the loans close to home.

One of their valued customers was Washington developer Dominic F. Antonelli Jr. He racked up nearly $76 million in loans for retail, hotel and office developments, according to an MNC executive familiar with Mr. Antonelli's loan records. The loans were backed not only by the projects but by Mr. Antonelli's promise to repay them if his partnership could not. Despite the risk of investing so much in one customer, MNC felt secure.

In three years, from 1986 to 1989, MNC tripled the amount of its real estate construction loans. By last June, one-fifth of the company's loans were in that risky category, more than any other major bank in the country, according to analysts' reports.

The ominous side of those numbers was lost in the excitement of profits. A year ago, the company prepared to report record earnings. MNC stock had just peaked at $29.25 a share and would soon split two-for-one. Dividends were increasing about twice as fast as those at other regional banks.

"MNC's management has been one that consistently delivers," said Nancy A. Bush, an analyst at Dean Witter Reynolds Inc., last February in recommending the company's stock to investors.

To the world, it appeared that Alan Hoblitzell had faced the future and conquered it.

"Who in the hell figured the bottom would drop out?" a former MNC executive said.

A new game

The examiners arrived in March. By then, the world had changed.

For more than two years, federal banking regulators had seen their counterparts from the savings and loan industry hauled before Congress and upbraided for their lack of vigilance. They had seen them ridiculed in the press. They had seen them fired.

Some MNC directors and executives say they are convinced that officials in the Office of the Comptroller of the Currency (OCC), which regulates banks, were determined to avoid that fate.

When the real estate market collapsed in New England last year, the bank examiners descended in force. They required many northeastern banks to greatly increase their reserves, which sharply reduced earnings and chilled bankers up and down the East Coast.

The examiners came down hard on the Bank of New England, the region's second-largest bank. The company set aside $1.5 billion against its shaky real estate loans, causing a $1.2 billion fourth-quarter loss. Before the examiners departed, five of the bank's top executives, including its chairman, were fired, according to newspaper accounts.

At MNC, executives were getting edgy, several of them report. The company couldn't sell $300 million in debt at the price it wanted. Its stock began to slip. In February, Moody's Investors Service, a New York credit-rating agency, downgraded MNC's bonds, reflecting its concerns about potential real estate losses.

MNC executives believed the world was overreacting. Still, anticipating a return visit by the regulators in early 1990, they planned to increase their reserves against potential losses, two top executives said. With that, they expected business to return to normal and the upswing to resume.

It took a handful of examiners only a few days in March to change their minds.

The team included Joe Hooks, fresh from his examination of the Bank of New England. A disarming man with an Oklahoman drawl, he arrived in Baltimore with a menacing reputation. Newspaper accounts quoted colleagues describing him as relentless in ferreting out sloppy lending practices, causing banks to take expensive corrective actions.

After his work in New England, he also had a new nickname, according to The Boston Globe: "CEO killer."

At MNC, Mr. Hooks and his team pored over a sample of MNC's real estate loan documents. Then they put MNC on notice. The company would have to use more stringent rules to evaluate loans. Even if bank payments were on time, a developer's project could be listed as delinquent if doubts were raised about its success.

The result was that MNC was forced to add $135 million to its reserves, almost wiping out its profits for the first quarter. Its income of $6.2 million was down 90 percent from the year before.

MNC executives said they were stunned by the tough requirements. Echoing complaints of the northeastern bankers, they said the regulators had changed the rules and were rigid in their interpretations.

"It was like arguing with the umpire," said one top company official.

The OCC denies its examiners were capricious. "OCC examiners are applying the same rules to their credit reviews that they have applied in the past," Robert L. Clarke, the Comptroller of the Currency, said in a speech in June. "If our rules haven't changed, what has? The economic environment. The markets."

In any case, the examiners weren't offering MNC many choices.

MNC couldn't stop the hemorrhage.

Moody's and Standard & Poor's downgraded the company's bonds three more times. The stock continued its plunge. The second quarter report showed a loss of $75 million as the bank more than doubled the amount of soured loans on its books.

Contributing to that loss was Mr. Antonelli, the Washington developer. Nearly three-quarters of his loans were classified as troubled. He later threatened to declare bankruptcy, the Washington Post said. His personal promise to repay the debt was becoming hollow.

Chairman surrenders

A siege mentality set in after the arrival of the examiners, one former executive said. "I think you had desperate people," another said. During the next months, bank officers reviewed loans night after night, weekend after weekend.

In July, the examiners returned, this time more than 50 strong.

"They were definitely on a mission," said one former bank executive. "These guys are not happy people. They're very somber people."

Their return prompted more jitters and rumors within MNC. One story making the rounds was that the regulators had counted BMWs in the corporate parking garage and snorted about the high-salaried bankers inside.

A newly-formed crisis committee of MNC directors insisted on better reporting from below, several executives said. The company hired a special team of former examiners from Price Waterhouse. Meanwhile, the rumor quickly spread that if regulators found a problem with any portfolio of loans, the lender would be fired.

The banks' losses were depriving MNC of cash to pay debt, finance non-banking subsidiaries and pass on dividends.

It could sell debt, but no one was buying. It could sell stock, but who would want it? It could sell subsidiaries, but they were either too small to matter or too important to give up.

Finally, Mr. Hoblitzell, described as frustrated and tired by one director, turned to Alfred Lerner to save his company.

Since the Equitable merger, Mr. Lerner had lost about $70 million on his stock. Now, according to several directors, Mr. Hoblitzell was asking him to pump another $180 million into the ailing corporation. Overcoming his aversion to having a dominant shareholder, Mr. Hoblitzell was giving Mr. Lerner a chance to own more than a quarter of the bank -- and possibly much more.

Mr. Lerner, 57, accepted the deal. Seven weeks later, in late September, he took Mr. Hoblitzell's job as chairman and chief executive.

Directors insist that no one pushed Mr. Hoblitzell out, althoug some saw it coming.

"He knew himself well," said Francis P. Lucier, an MNC directo and former chairman of Black and Decker Corp. Mr. Lucier, an old friend, was the first director Mr. Hoblitzell told of his decision.

"Sometimes people at the heads of corporations or banks crawl off in a corner and seal up. . . .The necessary change at the top doesn't take place," Mr. Lucier said. "When so much is coming at you from so many directions, he didn't feel he handled those issues as well as others might. He said the institution needed a hands-on guy . . . who can keep an even keel no matter how much turmoil there is."

Back to basics

On Thursday, a smiling Mr. Lerner strode into a conference room full of waiting reporters and MNC executives, plopped two Cuban cigars on a table, and described how he was dealing with the disaster.

With gallows humor, he answered question after question about MNC's mistakes. "There is nobody at any of these banks that wins the award for great lending in 1989," he said.

Unlike some company officials, he refused to blame regulators. "I have a lot of friends in the banking business," he said. "Probably I will have fewer friends if you write what I'm going to say now but I'm not one of those that put a whole lot of blame on the OCC. . .The fact is they did not make one single one of these loans."

As the man charged with returning the company to prosperity, he took pains to emphasize that a quick recovery was out of the question.

"We can afford to have you look back and say, 'It wasn't as bad as you thought,' " he said. "We cannot afford to have you look back and say, 'It was worse than you thought.' "

That morning, he released the company's third-quarter report showing $173 million in losses. The fourth quarter, Mr. Lerner said, promised more of the same. Even as he spoke, MNC's stock was sinking to a record low of $3.625 a share.

Mr. Lerner revealed that the continued slide had forced him and the board to pull out of their $180 million deal. With the severe losses, the transaction was too small. The only option left was to sell the profitable credit-card division and four other units.

Not once was Mr. Hoblitzell's name mentioned during the news conference. But Mr. Lerner's plans amounted to the undoing of his predecessor's grand design. After a decade of expansion and ambition, MNC would be shrinking.

Billions of dollars in assets will be pruned from the MNC tree. What remains is a corporation dependent on its core banks for earnings and survival. Although the company is losing perhaps its most valuable unit, Mr. Lerner said he was willing to give up the guaranteed income for the immediate proceeds to shore up the banks' eroded foundation.

Still, it'll never be the same. "A big, big piece of the company has been taken away," said Kyle Prechtl Legg, a banking analyst with Alex. Brown Inc. "It's never going to be as profitable as it was."

Ironically, in its weakened state, MNC has accomplished one of Mr. Hoblitzell's premier goals. Right now, it is an unlikely prospect for a hostile takeover.

The new chairman's ambitions for MNC were more in line with the banking company's first 40 years than its last 10.

"I think that good solid, old-fashioned, careful banking -- taking deposits and making loans that are supposed to get paid back -- is still good business," he said.

It doesn't seem that way now, he acknowledged. "The fact is, when you're in a situation like this, at the end of every week, you go back to the beginning of the week and you feel very dumb about what you didn't realize."

In jest, he allowed that it hadn't been his lucky day when he was named chairman. Did he regret hitching himself to MNC?

"If you stop the game today, the answer is probably yes. But I don't think the game has to stop today."

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