Plaza Home Mortgage to Be Sold for $120 Million : Banking: Fleet Financial Group will acquire Santa Ana-based firm, which has been hurt by rising interest rates.

By JAMES S. GRANELLI

Sept. 7, 1994 12 AM PT

TIMES STAFF WRITER

SANTA ANA —

Reflecting a continuing contraction in the mortgage banking industry, Plaza Home Mortgage Corp. said Tuesday that its directors have agreed to sell the company for $120 million in cash to Fleet Financial Group Inc.

The acquisition of fast-growing Plaza, based in Santa Ana, would make Fleet the nation’s fourth-largest mortgage provider, with $13.4 billion in loans made through July this year. It would be the nation’s second-largest mortgage servicer, billing and collecting payments on $88.2 billion in loans.

Fleet, based in Providence, R.I., also would gain a substantial presence in California, where it has been conspicuously absent.

Analysts hailed the transaction as a winning situation for both companies. They pointed out that Fleet would become a substantial player in the nation’s biggest residential real estate market and that Plaza shareholders would receive a good price--$10.125 a share--for their stock.

News of the pact boosted Plaza’s stock 17% to close at $9.625, up $1.375, in Nasdaq trading Tuesday. Fleet’s stock rose 37.5 cents a share to close at $40 on the New York Stock Exchange.

“The whole mortgage banking business is very difficult now,” said Gary Gordon, an industry analyst with the brokerage Paine-Webber in New York, “so everybody is having a tough time competing.”

Mortgage banks like Plaza have been hurt as rising interest rates have ended a long boom in mortgage refinancing activity that had helped make the industry highly profitable.

While the industry’s loan production nationwide is expected to fall by a third this year--from $1.05 trillion to $750 billion--companies like Plaza that rely totally on residential loans have found their volume cut in half, Gordon said.

“Luckily for employees and shareholders, commercial banks have a very strong interest in mortgage banking,” he said. “They see the downturn as their chance to get into the industry or expand.”

Among big banks that have bought mortgage lenders are Chase Manhattan Bank in New York, which said last month it would acquire American Residential Mortgage Corp. in La Jolla for $348 million; and Chemical Bank in New York, which bought Margaretten & Co. in Perth Amboy, N.J., for $330 million. Also last month, North American Mortgage Co. in Santa Rosa hired an investment bank, partly to help it find a potential buyer.

E. Gareth Plank, an analyst at Mabon Securities in San Francisco, said that Fleet, to maintain its position, “really needs to take advantage” of the industry’s doldrums to acquire good operations like Plaza. “It’s also savvy for Fleet because it moves them into a market where they have been pointedly absent,” he said.

John T. French, Plaza’s chairman and chief executive, said the company’s directors felt that “we owed it to our stockholders to test the market.”

“One of the things we had to look at,” he said, “is how people our size compete with companies like NationsBank and the other banking giants that are buying S&Ls; and mortgage companies.”

Fleet, with $48 billion in loans and other assets, said it would use its Fleet National Bank subsidiary to acquire Plaza and its subsidiaries: Plaza Home Mortgage Bank and Option One Mortgage Corp. Fleet would turn in Plaza’s savings and loan charter because it does not intend to expand its bank network into California, said Eugene M. McQuade, Fleet’s executive vice president for finance.

The transaction, expected to close by year’s end, is subject to approval by federal banking regulators and Plaza shareholders. A shareholder meeting has yet to be set.

Fleet said it hasn’t decided how many of Plaza’s 1,140 employees it would keep. McQuade said “less than a handful” of Plaza’s 40 loan offices in 13 states would be closed and that Fleet would maintain a strong regional office, probably in Santa Ana. But Plaza’s loan servicing operations here would be relocated to one of Fleet’s centers in Milwaukee or Columbia, S.C., he said. Plaza has a total of 450 employees in Orange County.

Plaza has only one full-service savings and loan branch. But it used that S&L; to launch a mortgage banking operation that grew from scratch in 1985 to become the nation’s 22nd-largest mortgage provider, with a solid reputation for lending money in lower-income and minority areas. It formed its Option One Mortgage Corp. subsidiary nearly two years ago to lend to those who don’t qualify for standard mortgages.

Plaza, which made $3 billion in mortgage loans through July this year and is servicing $9.2 billion in loans, had been highly profitable until the refinancing market turned. It recorded a $9.8-million loss for the second quarter.

French, the founder and moving force in the company, had been faced at age 62 with the prospect of rebuilding the company. Analysts said it would take years to get the company back to where it was just six months ago. French is the company’s largest single shareholder, with a 25.1% stake. If the company is sold, he would stand to make as much as $28 million on the deal before taxes.

Despite the lean times for mortgage bankers, Plaza still has a structure that can generate loans, French said, and that’s what Fleet wants. He added that Fleet also likes Plaza’s mortgage broker network and its Option One subsidiary, which has grown even while the company shed 335 employees earlier this year from its operations overall.

French said that institutional investors called him Tuesday after they heard about the proposed sale to voice their agreement. “It’s a very tumultuous time for the economy and for financial services,” he said, “and they said they thought we were making moves in the right direction.”

How the Lenders Compare

Fleet Financial Group Inc.’s acquisition of Santa Ana-based Plaza Home Mortgage Corp. would make the newly formed company the nation’s fourth-largest lender and second-largest loan servicer.

PLAZA HOME MORTGAGE CORP.

* Headquarters: Santa Ana

* Founded: 1985

* Business: Residential mortgage banking

* Chairman and CEO: John T. French

* Offices: 40

* Assets (second quarter, 1994): $975 million

* Loans originated (second quarter, 1994): $2.7 billion

* Loans serviced (second quarter, 1994): $8.5 billion

FLEET FINANCIAL GROUP INC.

* Headquarters: Providence, R.I.

* Founded: 1982