MNC Financial Inc. said yesterday that it will move management authority over about $1.1 billion in troubled loans to an obscure subsidiary formed last year. Analysts said the move could pave the way for a major restructuring of Maryland's biggest bank holding company.
MNC said that it will give South Charles Realty Corp. the job of collecting or selling more than $1.8 billion in problem loans and repossessed properties -- substantially all of MNC's non-performing assets, as well as some loans that are being paid but which the bank thinks will probably run into trouble.
Until yesterday, South Charles' job was to dispose of $700 million in assets, mostly commercial real estate, that MNC units Maryland National Bank and American Security Bank of Washington repossessed as the Baltimore-Washington real estate market faltered badly this year and last year.
"Now we're going to give it $1.1 billion that could be headed that way," said Daniel G. Finney, a senior vice president of MNC.
Yesterday's move was modest, because the problem assets still belong to Maryland National and American Security, but it rekindled speculation that MNC might spin off South Charles as a separate company to buy its non-performing assets, a catch-all category for bad loans and repossessed property.
That approach, if MNC chose it, would split MNC into "good banks" and a "bad bank" and then make the so-called "bad bank" independent of MNC. Maryland National and American Security would get fresh capital if the "bad bank" bought their bad assets, even at a discount, and the move would let the "good banks" effectively start over without their bad loans.
The company's $831 million loan-loss reserve would cover the difference between the amount MNC lent and the amount the "bad bank" or another buyer paid for the problem assets.
The move taken yesterday "would certainly help facilitate any kind of move they might make regarding that in the future," said David S. Penn, a banking analyst who follows MNC for Legg Mason Inc.
MNC's spinning off its bad loans into a separate institution would be a good sign the company is likely to survive the real estate downturn, Mr. Penn said.
"I don't think the [Federal Deposit Insurance Commission] will let them do it if there's any chance that MNC will fail after that," Mr. Penn said. If MNC decided to spin off the bad loans, "it would be good news," he added.
MNC Chairman Alfred Lerner said that the company won't comment on whether it plans to spin off South Charles Realty.
"It's a logical possibility," he said. "I'm not saying it is and I'm not saying it isn't. . . . It's not an enormous leap of logic."
Frank P. Bramble Sr., the company's newly elected president and chief executive, said that consolidating the management of the problem assets under South Charles is designed to make the assets easier to sell. He said that MNC would like to sell them "in bulk" to a small number of buyers, rather than selling each repossessed office building or piece of land individually.
Customers for big blocks of bad loans and repossessed property could be hard to find. Banks and insurance companies are the traditional customers for real estate assets, and Mr. Lerner acknowledged that these types of companies already have real estate problems and aren't likely to be interested in such deals.
He said that there are other options but would not elaborate.
Mr. Penn said that the "good bank, bad bank" solution has been used only once before, when Mellon Bank Corp. of Pittsburgh spun off $941 million of problem loans and property to newly formed Grant Street National Bank in 1988.
Grant Street paid Mellon $639 million for the assets, said Tom Butch a Mellon spokesman, raising $513 million of the money through a "junk bond" offering and the rest through offerings of common and preferred stock.
Mr. Butch said that the junk bonds have been retired and $65 million of the preferred stock has been redeemed by Grant Street, which has disposed of all but about $49 million of its assets.
"It has been a major success," Mr. Butch said.
But the task of duplicating the Grant Street success story has been made much tougher by problems that have plagued the junk bond market since 1988, said Arnold G. Danielson, a banking consultant in Rockville. Even Drexel Burnham Lambert Inc., the erstwhile king of junk and the underwriter of Grant Street's bond offering, has gone bankrupt.
"Every bank in the Northeast with Maryland National's problems would like to do this," Mr. Danielson said. "It's very difficult to pull off. Right now, getting financing for anything called banking is difficult."
If MNC can spin off South Charles as a new company, that could make Maryland National and American Security easier to sell, Mr. Penn said.
"That would facilitate the sale of the bank, pure and simple," he said. "At a time when all the major banks are picking their partners, this would be a good time for that to happen."
Federal banking reform laws being considered by Congress have helped prompt a couple of proposed major bank mergers recently, most notably this week's announcement that Chemical Banking Corp. of New York will acquire cross-town rival Manufacturers Hanover Corp. In addition, NCNB Corp. of Charlotte, N.C., has also proposed a merger to Atlanta-based C&S/Sovran Corp.
Mr. Lerner said that MNC has a policy against commenting on takeover speculation. "We don't rule things either in or out," he said. "I don't have any particular feelings one way or the other."
VTC Officials at the Federal Reserve and the Office of the Comptroller of the Currency said that they didn't have to approve yesterday's move, even though MNC is operating under close federal supervision.
But the OCC would have to approve the formation of a "bad bank" if MNC chooses that course, Dean DeBuck, an OCC spokesman, said.