With partner Rona.ld J. Perelman, Gerald J. Ford paid $1.1 billion for First Nationwide Bank. Now his job is to make the biggest thrift takeover in history pay off as spectacularly as First Gibraltar did in Texas.
SAN FRANCISCO -- Gerald
Ford's $1.1 billion purchase of San Francisco-based First Nationwide Bank is the biggest takeover in thrift-industry history, and it may be the boldest..
Together with his partner, the financier Ronald O. Perelman, Mr. Ford is trying to duplicate the spectacular success he achieved in his native Texas with First Gibraltar Bank, sold last year to BankAmerica Corp. When he bought Gibraltar from the federal government, Mr. Ford received subsidies and tax breaks that all but-guaranteed a good return.
But when he got First Nationwide from Ford Motor Co., there were no guarantees --just a thrift that had lost tens of millions of dollars in recent years, an institution handicapped by a weak, widely dispersed, branch network.
The genial, white-haired Mr. Ford, 50, is known as one of the saviest dealmakers in banking. But in an interview with American Banker just days after closing the First Nationwide transaction, Mr. Ford stressed the operating challenges he faces.
Since Ford Motor kept virtually all problem assets, the new team is starting out with a clean slate. But it remains to be seen whether even the surehanded Mr. Ford can turn one of the industry's biggest flops into a winner.
Q.: What was the condition of First Nationwide when Ford Motor handed it over to you?
FORD: Ford Motor Co. made a strategic decision to exit the business. They had done a lot of very good things at this company of which we will be the beneficiaries. All the loans are performing. Essentially we have a clean bank.
Q.: The rap on First Nationwide is that its branch-system is inefficient. Is that true?
FORD: Our predecessor hoped to be a nationwide franchise. Somewhere along the way they decided not to do that. The result is a patchwork branch system.
Ford had done a fair amount of work on the branches. They are good sizes. Our strategy is to rationalize the franchise.
Q.: By "rationalize the franchise," do you mean acquisitions and divestitures?
FORD: Our strategy is to have more of a regional focus in developing the franchise. That would mean an acquisition strategy here in this Western region, particularly in California.
On divestitures, right now deposit premiums and alternative funding sources have changed that game, We have a substantial amount of assets that require funding. We would have to see that any alternative funding was superior to the funding that we get through our branches.
We sold Illinois to Household because they approached us when we were the successful bidder. That was kind of a walk-in trade more than a strategic determination that we wanted to sell Illinois.
Q.: How soon are you likely to move on acquisitions?
FORD: We'll begin immediately to look for acquisitions. We bid on some Resolution Trust Corp. branch sales in August. We were unsuccessful.
Q.: There has been a lot of talk about possible sales of some large institutions, such as Glendale Federal, California Federal, and Coast Savings. Are you interested in these?
FORD: Basically we want to take a look at anything that comes up in this region. Those would be the upper size of what we would be interested in. Clearly we would be interested in smaller deals, whether one branch, 10 branches, 25 branches, or an entire institution.
When GlenFed went through its recapitalization, we took a look at it. I don't want to get into discussing individual acquisitions and the merits or the lack thereof.
Q.: What is your operating strategy for First Nationwide?
FORD: On an operating basis, we are in a tough business. California is a very competitive market. We will reorganize the mortgage banking operation. We prefer to operate it as an independent subsidiary of the bank, as we did at First Gibraltar.
On servicing, we need to concentrate on our efficiencies to get our cost of service per loan down. On the other hand, prepayment speeds have reduced substantially and have increased the value of the servicing.
Q.: How are First Nationwide's mortgage originations holding up?
FORD: Last year they did a little in excess of $3 billion. This year we will do less than $3 billion.
While our originations are down, the mix of adjustable rates to fixed rates is up substantially. And our strategy always has been to hold the ARMs for portfolio and to securitize and sell off the fixed.
The proportion has gone from 40% adjustable and 60% fixed to 80% adjustable and 20% fixed. The mix is such that we will be able to maintain the $6.5 billion that we have in single-family mortgages now.
Q.: Ford got into trouble with mortgage-backed derivatives in First Nationwide's portfolio. Where do you stand now?
FORD: Any derivative exposure with the exception of a swap that is in the money was taken out and covered by Ford. We do not have any exposure on our investment side.
Q.: There have been a lot of deals in the banking and thrift industries in the last couple of years. Why did you choose First Nationwide?
FORD: We had the holdover of First Gibraltar and we have been looking for a transaction to do for some time. We looked at a lot of transactions. This one had assets and a platform that could generate mortgages.
Q.: How would you compare your experience at First Gibraltar with your First Nationwide deal?
FORD: First Gibraltar turned out very favorably. Some of it no doubt was a result of the deal that we negotiated.
But there was a substantial number of things we did that were more of an operating nature versus a dealmaking nature. We bought a lot of mortgages from the RTC when people weren't buying them.
We bought First Gibraltar from the federal government, which had the ability to mark the balance sheet to market. And we bought this from Ford Motor Co. which also had the ability to mark the balance sheet to market. In both instances, we got clean banks.
In Gibraltar, we had certain assets we were managing. We didn't have a lot of origination capability. In this instance, we have performing loans.
We developed a mortgage loan-origination capability at Gibraltar, but it took us some time to do it. Whereas at First Nationwide we have a machine that is already operating. In this transaction, we clearly had to measure the risk. In the Gibraltar transaction, we didn't have to worry about any capital losses in assets.
Q.: What is the risk in this deal?
FORD: The first thing has to be the $12 billion in assets. Are we adequately capitalized with adequate reserves? Obviously, we think so. We don't have credit issues, if our diligence efforts have been correct. But that is the risk in this transaction.
Q.: What kind of operating profit will First Nationwide produce?
FORD: On a pretax basis, in the 1% range. The nature of our transaction helps us a bit. We have a substantial amount of long-lived assets that have adjustable rates.
And we have the ability with our origination capability to maintain the percentage of assets to deposits. So we should be assured of a reasonable level of profitability.
If we were starting out with a low number of assets and had to depend on an aggressive origination capability, then I would be much more pessimistic.
Q.: There have been projections that you and Ron Perelman could earn 20% or 25% on your equity investments in First Nationwide. Is that accurate?
FORD: We don't have any notion about what our hurdle rate ought to be. This transaction will turn out to be reasonably profitable by most any standards.
Q.: How much will you gain from the tax benefits you brought with you from the Gibraltar deal?
FORD: The tax loss carryforwards will apply in this transaction. They have a positive impact.
Q.: Do you plan to sell the thrift in a few years as you did with Gibraltar?
FORD: We clearly considered an exit strategy, whether it would be a public offering or a sale of the company. But we are not going to operate the business as if we were going to sell it.
You get a better result focusing on operations, even if ultimately you wind up selling it. Our thinking is to rationalize the network, build a Strong operating company. Then we will have a number of options to recognize value.