For MNC, Liquidity Is Key to Survival

Unlike most bankers, executives at MNC Financial Inc. aren't thinking much these days about rising interest rates.

An 11% ratio of nonperforming loans, a junk bond credit rating, and a regional economy lagging behind the national average all but rule out fresh debt issues or yield-curve plays at the beleaguered bank.

And MNC, which has $19 billion in assets, isn't making many new loans, either.

But at one of the country's most distressed large banks, funds management hardly goes unnoticed. "In our condition, liquidity management is a one-edged sword," said Peter Gartman, MNC's chief financial officer. "You make a mistake

and you wind up out of business."

Unable to tap the usual sources of fresh capital, MNC has devised another strategy. It is not renewing loans to borrowers outside its home market. By liquidating its $2.5 billion portfolio of these out-of-market loans, the Baltimore-based bank has been generating $100 million a month since January, when the program started.

The proceeds already have made a meaningful dent in the bank's hefty short-term debt, which still totals $1.5 billion. MNC paid off its other debt obligations earlier this year.

Executives hope the new cash will cushion MNC against unforeseen changes in market or economic conditions. The company already has $2.7 billion in assets that it can convert into cash within 30 days.

"We have to be in a situation where if the recession lasts 18 months [instead of 12] and nonperforming assets continue to rise, we're still around," Mr. Gartman said.

Souring real estate loans have made MNC one of the country's most distressed banks. It lost $440 million in 1990 and was forced to sell its prized credit card business to raise cash. That sale nudged capital to a sound 6.3% of assets.

Nonperforming loans improved in the first quarter, but analysts are ambivalent about the future.

"It's admirable MNC is trying to do some innovative things on the funds management side, but ultimately [its survival] comes down to the asset quality side. They really are at the mercy of the real estate market," said Michael Plodwick, an analyst at C.J. Lawrence, Morgan Grenfell Inc.

MNC has more than 30% of its loans in real estate.

Mr. Gartman said the challenge to MNC's funding strategy is that as the bank allows loans to be repaid, it must be sure to cut staff. "You have to go into collect mode" which requires less staff, he said.

In May MNC announced a $100 million expense reduction program designed in part to accommodate this reduced need for staff.

Mr. Gartman said his goal is to get the company's credit rating back to investment-grade status. Once that happens, he said, more funding alternatives will be available.

For now, he said, even fed funds can be hard to come by, because, though overnight, they are unsecured. He said the company has mostly been using repos, which are overnight to 30-day maturities but secured. These are the short-term loans being repaid right now.

Mr. Gartman is realistic about the company's chances, but he's encouraged. Deposits have been increasing at a rate of $15 million a month, since January. MNC lost deposits last year.

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