Despite a healthy first-quarter profit bolstered by the sale o its credit-card division, MNC Financial Inc. told federal regulators last month that its two banks will not be able to reach previously agreed-upon capital levels this summer, according to MNC's annual report.
MNC, the parent of Maryland National Bank and American Security Bank in Washington, said that as part of its three-year capital plans submitted March 1 to the Office of the Comptroller of the Currency, the company concluded that its two banks "will not attain the capital ratios" prescribed in earlier regulatory agreements.
Regulators responded 10 days later, however, saying they would not attempt to enforce the capital ratios "as long as the banks continued diligent efforts to reach the required capital levels and their financial condition does not deteriorate significantly."
If MNC is unable to comply with the regulatory agreements, it could face a number of actions having "a substantial negative impact," according to the annual report. They include the assessment of "substantial civil money penalties"; the enforcement of the agreements through the courts; and "the suspension or removal of officers, directors," the report said.
"If a good faith effort is being made, that's what we want and want to see continue," said Dean DeBuck, a spokesman for the OCC. "If that wasn't the case, that would be different, but that is what's happening."
An MNC spokesman, Daniel G. Finney, declined to comment last week, except to say that the banks were "comfortably in excess" of all regulatory requirements as of March 31.
MNC, the holding company for the two banks, has reported that its capital ratios are well above federal requirements, thanks to the sale of MBNA Corp., the banking company's prized credit-card unit.
Strict operating agreements between MNC and regulators were
signed in October after a federal exam of the bank turned up extensive loan problems in the company's real estate portfolio.
At that time, MNC was given stringent and higher-than-usual capital targets that it agreed to meet by the end of March and June.
The difficulty in meeting the guidelines, however, apparently stems from various unforeseen problems that have surfaced in the intervening five months.
Not only did the sale of MNC assets take longer than expected, but the proceeds from the sale of MBNA did not provide banking compnay with as much money as earlier expected. Moreover, an additional $165 million set aside in the first quarter to cover possible bad loans further ate into the banks' financial condition.
MNC, citing a $444-million profit enjoyed from the sale of its credit-card unit in January, reported Thursday that it earned $154 million, or $1.75 a share, during the first three months of the year.
Maryland National, with $14.2 billion in assets as of Dec. 31, received $236.5 million thanks to the January sale, which would have boosted its total equity capital to $611.3 million at year-end, the documents said.
American Security, which had $5.6 billion in assets at the end of last year, received $280 million thanks to the transaction, more than tripling its total equity capital to $390.2 million.
"The sense that I get is the regulators have backed off, saying 'You've done what you told us you'd do, so if you fall short of the requirements, that's OK,' " said David S. Penn, a banking analyst with Legg Mason Inc.