Signaling continued merger-integration woes, First Union Corp. Wednesday acknowledged it plans to shutter nearly half the offices of its recently acquired home equity lending unit, Money Store, eliminating 285 jobs.
A First Union spokesman said 32 of the 71 offices of the Sacramento, Calif., unit, which the banking company acquired in a controversial deal last year, would be closed. Loan processing operations at all of its branches would be consolidated at its headquarters and at an office in Pennington, N.J. At least 16 of the branches will be closed within the next 60 days and the remaining ones by the end of March, the spokesman said. The closings were first reported in the Orlando Sentinel.
Analysts read the latest move as a sign that the troubles at Money Store are worse than originally thought. Last year, the bank wrote off the entire $2.1 billion it paid for the lender, amid concerns that Money Store, like other subprime finance specialists, had underestimated prepayment rates on its loans.
This year, Money Store pared 750 employees, or about 14% of its work force. Also, Money Store's small-business lending unit dropped from its longtime No. 1 position in the market after its lending dropped 4% in 1998.
"The Money Store has been a disaster," said Lawrence Cohn, an analyst at Ryan, Beck & Co. "First Union is under tremendous earnings pressure. I think basically they're looking to get out of it. One presumes they're going to have to do more."
Anthony Hoppa, a First Union spokesman, acknowledged that the moves would cut costs, though he declined to say how much.
But he also said the new round of layoffs and closures was intended to help the lender's sales efforts. Customers of soon-to-be closed branches will be able to use toll-free numbers to manage their accounts. Furthermore, he said, Money Store remains profitable.
"This is not an expense-driven initiative. We're trying to create a more dynamic environment in the branches," he said. "We want the branches to concentrate on selling."
Mr. Hoppa's remarks were all but dismissed by analysts who argued that it would be "next to impossible" to build up a subprime home-loan business by slashing branch offices. They also noted that the timing of the cuts suggests deeper trouble because the home equity business is showing signs of a rebound.
With interest rates rising, many mortgage lenders are emphasizing home equity loans as an alternative to refinancing for homeowners who want to borrow cash.
"Sounds like they're trying to make the best of a bad situation," said Michael L. Mayo, an analyst with Credit Suisse First Boston. "The Money Store was a bad acquisition and it sounds like they're trying to cut their losses."
The halving of Money Store is just another in a yearlong series of troubles for First Union: The bank has seen its stock tumble after it twice warned that it would not meet earnings projections. Profits fell 19% in the third quarter.
President and chief operating officer John Georgius announced in July that he would resign at yearend. And the bank has acknowledged significant problems in integrating another big acquisition, Philadelphia-based CoreStates Financial Corp.
James Maynor, who headed First Union's mortgage unit and took over as Money Store CEO in August, did not return phone calls seeking comment. But upon taking the job, he had warned there might be a need for cutbacks.
"I don't think we're dealing with something here that is broken," Mr. Maynor told American Banker in August. "I think we are dealing with something that just needs ... sort of like the surgeon ... a cut in the right place."