NationsBank Corp., the Charlotte, N.C.-based banking behemoth, put to rest yesterday the takeover rumor mill surrounding Maryland's largest banking company, MNC Financial Inc.
The nation's fourth-largest banking company agreed to invest $200 million in MNC in exchange for 16 percent of the Baltimore-based company's stock. NationsBank also would ,X receive an option to buy the rest of the troubled company within five years for at least $1.24 billion.
MNC officials were quick to assure shareholders and customers that they would see few or no effects from yesterday's agreement, which took about one month to negotiate. The $200 million investment will boost MNC's capital, which is money kept in reserve to cushion against possible losses.
The agreement, known as a "stakeout merger," allows NationsBank to wait and watch as MNC, parent of Maryland National Bank and American Security Bank in Washington, continues to work through its $1.4 billion portfolio of troubled assets.
The merger, if it ultimately takes place, would further the consolidation taking place in the country's banking industry and give NationsBank unchallenged dominance in the country's fourth-largest combined market.
MNC, which had $16.6 billion in assets and 241 branches on June 30, has suffered large losses in the past two years, primarily because of problems with its portfolio of commercial real estate loans. The company lost $440 million in 1990 and $70 million last year, helped significantly by a $444-million profit enjoyed from the sale of its credit-card unit, MBNA Corp.
In last year's fourth quarter, the company lost $82.4 million, primarily because it had to write off the value of so many of its troubled loans. But in the first and second quarters of this year, it was able to report modest profits of $1.1 million and $2 million, respectively, partly by selling off securities.
NationsBank can trigger its takeover option any time before Sept. 30, 1997, by paying at least $14 a share for MNC, the companies said yesterday. The final price would depend upon when the takeover was executed: the longer the delay, the higher the price.
"As far as I'm concerned, it's an option with a very large likelihood of a merger," said MNC chairman Alfred Lerner, the company's largest stockholder with about 8.55 million shares, or 9.5 percent of the firm.
He said the agreement forbids him from selling his shares for two years, a timetable Mr. Lerner estimated was the likely date for NationsBank to trigger its acquisition option. In the meantime, Mr. Lerner said he would ask federal regulators for a two-year extension on a Dec. 31 deadline that forces him to choose between his chairmanships of MNC and MBNA Corp., the Delaware-based credit card company that MNC spun off in a public stock offering last year.
NationsBank's $200 million purchase of MNC securities requires regulatory approval. The merger deal would require regulatory consent and the approval of shareholders.
"We know the regulators are supportive of the transaction in concept," Mr. Lerner said. That cash infusion would entitle NationsBank to non-voting preferred stock in MNC that could be converted into 17 million common shares at a price of $11.75 a share. Under the agreement, NationsBank would not be entitled to a vote on MNC's board, or to any other form of control over the company unless it receives the go-ahead for a merger.
In contrast to most other takeover deals, the NationsBank-MNC arrangement does not provide an immediate return for current MNC shareholders. In fact, the stock market gave a tepid reception to the proposal yesterday by trading MNC's shares 25 cents lower, though some analysts said the movement merely reflected selling by arbitrageurs who had anticipated a more immediate payoff. The stock closed at $11 a share on the New York Stock Exchange in heavy volume. NationsBank, also an NYSE stock, remained unchanged at $45.875 a share.
But analysts pointed to the long-term benefits for MNC shareholders. "They're going to be able to hitch their little pony to a very strong horse," said Anthony Davis, an analyst with Wheat First Securities in Richmond.
That strong horse has $110 billion in assets in 1,800 branches spread throughout nine states. NationsBank president and chief executive officer Hugh L. McColl Jr. pointed out yesterday that the proposed $200 million investment amounted to only one quarter's profits, and that he was willing to take the risk in MNC, especially in light of the dominant share the acquisition would give the company in the Baltimore-Washington market.
NationsBank has 149 branches in MNC's market area, most dating from before the merger of C&S/Sovran Corp. and NCNB Corp. last year, which formed NationsBank.
Although MNC exceeds all regulatory and statutory capital requirements, the $1.39 billion in non-performing assets it holds could put a strain on capital if losses from those loans escalate.