The major restructuring First Union Corp. announced Monday ends an era of ambitious empire-building and aggressive risk-taking for the Charlotte, N.C., banking company.
There were few surprises in First Union's decision to shutter the home equity lending operations of Money Store, the consumer finance giant it bought two years ago, and sell off its mortgage servicing and credit card portfolios, two lines where it said it lacked the scale to compete.
First Union also said it would greatly reduce its exposure to interest rate and credit risks by liquidating $13 billion of bonds and $900 million of poorly performing loans, mostly to health-care companies, and by allowing Money Store's servicing portfolio to run off. The $2.8 billion restructuring charge was at the upper end of the range Wall Street sages had been predicting for the company last week.
Parts of the plan are already being executed. First Union has a letter of intent to sell the $50 billion servicing portfolio to Wells Fargo Home Mortgage. The Des Moines unit of Wells Fargo & Co. would leapfrog ahead of Chase Manhattan Corp. and Bank of America Corp. to become the nation's largest mortgage servicer after the deal, and also intends to buy First Union's servicing center in Raleigh, N.C.
The banking company should be able to unload its $50 billion credit card portfolio quickly, said Robert K. Hammer, president of RK Hammer Investment Bankers, a Thousand Oaks, Calif., firm that specializes in sales of credit card portfolios.
"When one of the larger ones does come up, people tend to drop what they're doing," he said.
Those considered likely buyers again include Chase and Bank of America along with MBNA Corp. and Citigroup.
The restructuring will result in some $2.8 billion of after-tax charges, First Union said. The company said it now expects to earn 72 to 74 cents per share in the second quarter, below Wall Street analysts' estimates of 85 cents. About 65 cents would come from the core businesses that First Union said it will now focus on - general banking, capital markets, and asset management.
Ken Thompson, First Union's chief executive, said in an interview that he did not know yet how many employees will lose their jobs as a result of the restructuring, but said approximately 2,300 Money Store workers would be let go.
In a teleconference with analysts Monday morning, Mr. Thompson indicated that the "new" First Union still has an appetite for deal-making - but a much smaller one.
"We're not going to make significant acquisitions in the foreseeable future," he said. First Union would be interested in acquiring small brokerage or asset management companies, he said, but nothing huge - and no banks.
That is quite a change for a company that was on a buying spree in the late 1990s. "If there's any one phrase" to describe First Union's old strategy, "it's far-flung" - geographically and by product - said Stephen Biggar, an analyst at S&P Equity Group.
In 1998 alone First Union bought Money Store, Wheat First Butcher Singer, Corestates Financial, Bowles Hollowell Conner & Co., and Covenant Bancorp. Analysts said First Union had a hard time integrating its acquisitions, which led to disruption of service for some customers.
"It's easy to see how [management's] time would have been stretched in too many different ways to make all the deals work at the same time," Mr. Biggar said.
Another problem, analysts said, was that in some cases - most notably Money Store - First Union simply overpaid.
Had First Union paid less for Money Store and other companies, Mr. Biggar suggested, "they would have had an easier time working it out and being profitable." In 1998, when bank stocks were rich, "banks had fairly high currency they could throw around with ease, and that breeds overpaying for things."
In the interview Monday, Mr. Thompson, who took over the CEO spot from Ed Crutchfield in April, acknowledged, "Clearly we would have paid less for some of the acquisitions" if it had known what it knows now. "Hindsight is 20-20," he said.
Mr. Thompson was quick to add that the First Union's new business model will makes give its earnings a higher quality and faster growth.
By buying Money Store, First Union entered a risky business. Not only are the borrowers of such loans bigger credit risks, but securitizing such loans requires retaining residual, interest-only securities - which are highly vulnerable to both credit risk and prepayment risk when rates fall and when the capital markets become volatile.
Another practice that First Union is abandoning is the use of one-time gains on investments unrelated to its main businesses.
"We will get gains like those periodically but when we get them we're going to let you know what they are," Mr. Thompson told analysts on the teleconference Monday. "We don't want you to base your earnings projections on those."