ROBERT J. MYLOD : ‘Beverly Hills Savings Is Back’ : New Owner Is Breathing Life Into the Once-Dead S
“Beverly Hills Savings is back.” That’s the optimistic phrase emblazoned on posters hanging at the six branches of the once-insolvent savings and loan.
The Mission Viejo-based S&L; had been operated by regulators since April, 1985--longer than any other insolvent S&L.; With $1.6 billion in assets, Beverly Hills Savings was headed for liquidation.
But the S&L; was brought back from the dead when it was sold at 8:30 p.m. on Dec. 31 with $983 million in federal assistance and $52 million in cash from its new owner, Michigan National Corp.
Michigan National, owner of Michigan National Bank, is no stranger to trouble. Its former chairman, Stanford Stoddard, was convicted of fraud, and one of its Detroit rivals, Comerica Inc., tried to take it over while it was bringing in a new chairman 4 years ago.
But the new chairman, Robert J. Mylod, thwarted the takeover attempt and assembled a management team that put the money-losing company back in the black. The effort boosted the company’s capital base--its insurance against losses--from $180 million to $700 million and led to net income of $93 million last year and more than $9 billion in assets.
With the nation’s fastest-growing mortgage company, Independence One Mortgage Corp., and a national investment firm, Independence One Investment Services Corp., Michigan National hopes to revive the operations of Beverly Hills Savings and gain a foothold in the California market. Under current laws and regulations, a Midwestern or Eastern bank cannot buy a healthy bank or S&L; in California, but can buy an S&L; certified as insolvent by regulators.
Mylod, 49, is a former president and chief operating officer of the Federal National Mortgage Assn., a reseller of mortgage loans, and is a former president of Advance Mortgage Co. The New York native also worked for Citicorp in New York, the nation’s largest banking firm, for 14 years.
While in Orange County last week, Mylod told Times staff writer James S. Granelli why his firm entered the Southern California market, why it targeted Beverly Hills Savings and what his plans are for the $1.6-billion institution.
Q. What opportunities does the savings and loan field offer a bank holding company?
A. I don’t view it as the savings and loan field. I think that with Beverly Hills particularly, it is the chance to become involved in the financial services business of Southern California. And Michigan National Corp. will be bound by all of the rules that apply not only to savings and loans but also to bank holding companies. But within that context, Michigan National views this as an opportunity to provide a wide array of financial services to its customers, hopefully a growing customer base in the Southern California market. So there’s not going to be any specific focusing, if you will, on whether it’s a savings and loan or a bank.
Q. So had there been a bank available, assuming California laws would have allowed it, you would have purchased the bank just as well as an S&L.;
A. I think that’s absolutely possible. It’s all a function of what kind of transactions can be negotiated that are in the best interest of the stockholders of Michigan National.
Q. Then the opportunity to get into the Southern California market was paramount.
A. Exactly. That was really the attraction. The Southern California market, while competitive, is a large and very vibrant market, and we think it will continue to be that way as far into the future as we can peer. We’re just delighted to be part of it.
Q. Others have come into the Southern California market from out of state, looked at it much the way you have, but found it very, very difficult to compete. Why do you think will succeed where others have failed?
A. The business of running a bank is a very difficult business and the only way to make it work is to have some very highly talented people. We have some highly talented people in this organization, and we’re going to need more highly talented people in order to be successful in this market. I think you can look out on the playing field and see it littered with a lot of unsuccessful players or competitors. By the same token, I think I could go out and point out some people who have come into this market and been quite successful. The key difference is the people and the strategies that they have employed. We recognize it’s a tough market, no question about it, but we’re willing to step up and we think, without being overconfident, that we can be successful.
Q. While the Federal Reserve will be holding you to certain kinds of restrictions under bank holding company laws, are you going to be able to use any of the broader savings and loan powers such as real estate joint ventures, the purchase of equity stocks or even insurance sales?
A. That is so far into the future in terms of our planning that I don’t think it would really be meaningful for me to answer the question. Our job right now is to understand the business as it exists today and to build ourselves a reasonable plan for growing the business. We’re not going to be pursuing any of the, let’s say, more liberal powers that savings and loans have for the time being. We’re going to be focusing on more what I would call traditional types of financial services.
Q. Why did Michigan National look for acquisitions out of state? Had it saturated the market in Michigan to the extent that it had to look elsewhere for customers for growth?
A. We felt that by the year 1988, we had produced a much stronger balance sheet, significantly grown the capital of the business and significantly improved the quality of our loan portfolio. So it was time to begin to expand our business. You have to understand the context in which we say that. The banking business of this country, both the savings and loan and commercial banking, are under a process where there is going to be tremendous consolidation over the next 5 to 10 years.
Q. I take it that Michigan National plans to emerge intact from the consolidation process?
A. Michigan National would not be a survivor 10 years down the road if it simply stayed the same size. It is going to have to attract, in one form or another, more capital to manage in order to be a real competitor down the road. So in 1988 we began to look for ways to expand the business. We view ourselves as an entrepreneurial management team, and we’re looking for deals and expansion opportunities that make good sense for our stockholders. We already were a national company before we became involved with Beverly Hills. So there’s a national orientation and, therefore, we said we want to do acquisitions where we can find them in the best markets at the best possible terms for our stockholders. Therefore we began to pursue the possibility of an assisted merger in a good market.
Q. Why did you settle on Beverly Hills Savings? This is an S&L; which even the government-hired operators have said was ready for the junk heap. It was going to be liquidated.
A. What we saw in Beverly Hills was a relatively small branch system with relatively high deposits per customer in a tremendous economic climate with relatively few management problems. When you cut through the whole thing, this company has been in the process of taking deposits for the last several years. It has no loan-producing capabilities at this point. It’s managing a portfolio of relatively sick loans. But we saw a tremendous franchise name--the name Beverly Hills runs all the way back to 1929 (when the S&L; was established) and has a very proud history, except for the most recent past. We think we can apply the same kind of formula to managing the business that we did at Michigan National. We think this is a tremendous opportunity.
Q. Even with all the bad loans, especially in the commercial area, that you now must manage?
A. We expect to get into commercial lending at some point in time. We think we’re very well qualified to manage the existing portfolio of Beverly Hills. Michigan National has a portfolio of about $1 billion of commercial real estate-oriented mortgages. In 1988, we wrote off about $380,000 against that $1 billion in assets. That’s a little less than 4/100ths of 1%. That is an outstanding record that my colleagues in that part of the business have turned in. Commercial real estate lending has been kind of a sore subject around the country, and several banks have had some problems with it. We are always very nervous and concerned about the portfolio, and we look at it very closely. Once we begin to get control of the problems at Beverly Hills and turn it around and liquidate some of these assets, we expect to use that expertise to participate in a more responsible way in the commercial real estate lending activities in this market, which is a tremendous real estate market.
Q. Were you the lone bidder on Beverly Hills Savings?
A. There were other competitors. I know we were competing against other organizations to acquire this bank. But you’d have to ask the regulators who.
Q. You have said previously that you want to make this institution grow. Would the strategy that Citicorp used at Citicorp Savings provide a road map for you? Citicorp acquired the failed Fidelity Federal in 1983 and went on a buying spree, picking up more than 50 branches from various S&Ls; in the state.
A. We would not have done this deal if we didn’t think this was a good, viable institution with a good opportunity to grow. That is clearly our focus and we’re going to try to recruit with that in mind. We think we have a good chance of being successful. We’re not going to try to do a Citicorp strategy. We are a much smaller organization than Citicorp. Citicorp earned $1.7 billion last year. Michigan National earned $93 million. We’re not going to have this big, massive national strategy. We’re just a little guy trying to provide outstanding service to the people that we serve. But we’re here to make this thing work.
Q. Nevertheless, Beverly Hills Savings could be used eventually to buy other S&Ls;, perhaps large, profitable ones.
A. Absolutely. Once we’ve got a sense that we understand where we are and a sense of control--and once we’ve actually been able to make it profitable--clearly we’re going to want to expand it.
Q. Is it possible that in 1991, when banks from across the nation are allowed in California, this will become Beverly Hills Bank?
A. That’s a speculation, but yeah, that’s possible.
Q. What have you learned in 3 weeks or so of running Beverly Hills Savings?
A. The first thing is that there have been very few surprises. The company is generally well managed, we think. It’s got some excellent managers who we think are going to add to or create the future of this company. Over time, we expect to augment them, particularly with a chief operating officer, whom we hope to recruit in a reasonably short period of time and who probably is going to be a product of this market. This is a totally different environment from Michigan and we would like to get somebody who has very high values, a very high sense of integrity, understands the market and can help to create the vision of the future for Beverly Hills Savings in Southern California.
Q. How does the $983 million in Federal Savings and Loan Insurance Corp. assistance break down?
A. The easiest one to understand is the $800-million negative net worth note. FSLIC, in signing that note, commits itself to repay no later than 10 years from now the entire $800 million which is the hole, if you will, in the balance sheet. Then, the rest of it is going to be interest FSLIC pays on the note and FSLIC subsidies on the bad assets. The third major area is that they will make Michigan National whole, in effect, for any losses on the sale of all these covered assets.
Q. Still, nearly $1 billion is a lot of money to revive a dying S&L.;
A. If the regulators went to the other alternative, which is simply to liquidate this company, their cost would clearly have been substantially higher than that. And they would have taken a potentially viable economic instrument out of the community and 160 people who work at Beverly Hills Savings would have lost their jobs. As long as the operators that come in and run these businesses are responsible, they are doing incrementally something that is valuable to the taxpayers of this country. This industry problem exists and it’s not going to go away. The question is, what do you do with it now that it’s there? And what’s the best way to deal with it? I can’t say that what the FSLIC did is absolutely perfect, but I can say that I believe they had to do something.
Q. You now have roughly $800 million worth of tax benefits--part of about $5 billion in tax breaks that all buyers of failed S&Ls; got last year--that you hope to use to reduce the amount of taxes Michigan National pays. In addition, regulators gave buyers more than $37 billion in tax-free assistance last year. Is that too much to pay?
A. What is the alternative to doing this transaction? The fact is that this (problem) has happened. It’s here. You can’t make it go away. And someone’s got to manage their way out of it. The federal government, unfortunately, is the insurer of the deposits of all these savings and loans and banks around the country and has the responsibility of doing that. I don’t know what the ultimate solution will be. But I think the proposal made by the Bush Administration (to charge depositors up to 30 cents for every $100 on deposit at banks and S&Ls;) is a very poor one because it’s very shortsighted. All it does is create more pressure on the savings and loan industry, which it certainly doesn’t need right now. But there is a problem there and it’s got to be worked out. The part that we’re playing, I think, is helping to reduce the amount of the problem. I really believe that.
Q. Some S&L; industry leaders have criticized the FSLIC promissory notes as not being worth the paper they’re written on. Are they?
A. Absolutely. We did this deal with the federal government, and the General Accounting Office has stated that the full faith and credit of the United States government is behind the notes that are being issued. We just don’t have any concern about that. There are some inquiries made by various members of Congress into these transactions, but we’d be happy to share information on the entire transaction with anybody. We think this is a good transaction for Michigan National Corp. We think it’s a good transaction for Beverly Hills. And we think it’s a good transaction for the taxpayers of the United States.
Q. Can you break down the bad assets that are costing Beverly Hills money?
A. We’re going through that portfolio of loans. It’s about $800 million. Somewhere by the middle of February, we will have categorized every single asset that we have on the books at Beverly Hills. These assets are spread out all over the country. Some are in Texas, some are in Colorado, some are in Wisconsin, some are in Illinois. A lot of them are in California. We will have a specific management strategy for each one of these properties by that time. Some of these are loans; some are properties we took back in foreclosures; some of them are direct investments.
Q. Is it mostly residential?
A. It’s mostly commercial, but there are about $200 million or so of residential mortgages in the portfolio. Our mortgage company subsidiary, Independence One Mortgage Co., which has a servicing portfolio of about $8.5 billion, is going to become involved in the active management of that single-family residential portfolio. The people there understand that business exclusively. And we have a very sophisticated commercial lending group working with the existing team to categorize these loans.
‘The Southern California market, while competitive, is a large and very vibrant market, and we think it will continue to be that way as far into the future as we can peer. We’re just delighted to be part of it.’
--Robert J. Mylod, chairman,
Michigan National Corp.