In a dramatic effort to shore up its faltering finances, MNC Financial said today that it will put its profitable $1 billion credit card operation on the block.
The announcement 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 putting $350 million into its reserves for possible credit losses.
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 company of Maryland National Bank and American Security Bank in Washington.
The company and its banking subsidiaries also have entered into written agreements with the Federal Reserve Board and the office of the comptroller of the currency, giving the regulators broad powers in the running of the company.
"Wow," was the reaction of David S. Penn, a bank analyst for Legg Mason Wood Walker. He said MNC apparently is preparing for the worst and taking steps to strengthen its capital positions. MNC is selling one of its best divisions "so the company survives no matter how bad things get," Penn said. He estimates 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 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," the company said.
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 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; $297 million of the non-performing loans were either contractually current or past due by fewer than 90 days as of Sept. 30.
Stockholder equity has increased by 4 percent from $1.47 billion on Sept. 30, 1989, to $1.53 billion at the end of September. But stockholder equity as a percentage of assets dropped from 6.3 percent to 5.9 percent.
MNC had a net income of $68.8 million, or $1.13 per share, during the 1989 third quarter.
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 $192.9 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 for MNC. MBNA America has been a leader in the affinity card market and 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.
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 MNC chairman and chief executive officer Alfred 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 dividend 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 to the Federal Reserve reports 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 also require that senior executive appointments be approved by the regulators.