Q. Financial Corp. of America was on the brink of disaster when you took over a few months ago as the chief executive of this country's largest savings and loan. I'm sure that difficult days are still ahead, but how have you apparently turned things around so quickly?
A. It was a desperate time for the company and the rebound that we have experienced was created by a number of things: support from the Federal Home Loan Bank system, support by Wall Street, and intense effort by our people to package our assets so they could be used quckly as collateral for loans elsewhere. And we have been fortunate due to the downturn in interest rates.
However, I believe the return of public confidence has not been a result of interest rates. That has been a result of the government, Wall Street and our company pulling together to meet our cash outflow needs. Once the public recognized that, if they wished to have their money back we would give it to them, their concern went away.
Q. When you took over, Financial Corp. was in the midst of a crisis that encouraged depositors to remove billions of dollars. What other steps did you take to restore public trust?
A. We mounted an effective public relations effort directed at telling the public the facts. We reconstituted our board of directors and selected a new auditng firm. We made a number of management changes. We have cut operating costs quite a bit. Next year our workforce will be reduced by 1,500 people and we put in place a plan to sell many of our company condominiums, airplanes and automobiles. We stopped plans to build a new major corporate office.
Because of this myriad of steps we put in place, savings flows have returned and we went forth with a successful brokered certificate of deposit offering through Prudential-Bache that has been completed. The offering raised $1 billion in new deposits.
Q. Wall Street analysts remain concerned about the size of the problem loans in your portfolio. And they fear that if interest rates turn around, you may not have quality assets to sell to meet your needs for cash. How bad is the quality of the loan portfolio?
A. We have nonperforming loans, about twice the industry average, of $1.3 billion. We have a credibility situation where Wall Street didn't believe our numbers and didn't believe we were adequately reserved to account for nonperforming assets , so we established a special independent real estate task force with four outsiders and one insider. Their main goal is to establish an evaluation of our real estate loans using new appraisals by outsiders to establish credibility. That should be completed by late January.
Q. What are your goals for the future? Will Financial Corp. survive as a much smaller savings and loan?
A. I think reducing the size of our problem assets and increasing our net worth to a much higher ratio relative to the size of the company. We are very interested in exceeding the regulatory net worth requirement of 3 percent, and I think we will meet our objective of 4 percent by the end of 1985. We're also very interested in reducing the company's exposure to interest rate fluctuations by building up more flexible-rate assets and more long-term liabilities.
We want to increase our liquidity and reduce the premium we have to pay to attract savings. We pay about one-half of one percent age point above our competitors. The other thing we have to do is to clean up our documentation and work on strengthening our organization and management systems.
1985 will be a year of shrinkage for this company and a year for us to get our house in order. With some downward movement of interest rates, the size of the company could be $25 billion from about $32 billion by the end of 1985. Downward movement of interest rates would enable Financial Corp. to profitably sell some of its relatively high-yielding, fixed-rate assets.
Q. What results are you expecting in terms of earnings and what are your deposit flows?
A. We expect a loss in the fourth quarter and, with a favorable interest rate climate, a profit in 1985. Earnings will take a back seat to the other changes. Earnings are still important, but what is paramount is getting the company restructured. Through the first two months of the fourth quarter, deposits are up $1.7 billion, including the Pru-Bache C.D. offering.
Q. Financial Corp. was growing rapidly before the company was forced to take a big earnings write-down. Public confidence was shattered. What can others in the industry and bank regulators learn from this experience?
A. We like to learn from the history of this company, and the lesson here is that you pay a tremendous price for fast growth. You also run a greater vulnerability to high interest rates when you continue to put long-term assets on the books with short-term borrowings. We have a very large mismatch of our assets and liabilities.
Q. There has been a lot of negative publicity surrounding the $2 million severance payment that Charles Knapp received when he resigned as chairman in August. How serious a matter is this?
A. There has been no item that I have heard more criticism about from our shareholders and our customers. Where it stands is that we have filed a complaint seeking recovery of the funds. We're going to pursue it vigorously. We don't sue unless we are serious. We would prefer if he would just return the money, and we asked for that before the lawsuit was filed, but we are deadly serious about this lawsuit.
Q. With deregulation, savings and loans in this country now engage in a wide range of activities. Some S&Ls clearly are riskier than others, yet they all pay the same premium for the federal insurance that guarantees deposits up to $100,000. Do you think this is a fair and effective system?
A. I feel the whole trend of deregulation went too far. Along the way, it was somewhat forgotten that in the final analysis, it is Uncle Sam's checkbook and the taxpayers' dollars that pay for the folly of insured financial institution's management.
I believe new rules should be put in place that provide safeguards against government deposit insurance paying for mismanagement. I am in favor of a program that would involve an "early warning accountability matrix." The accountability would be that each month at a directors meeting, the directors would be required to review this early warnings matrix, and the early warnings matrix could be a list of the salient risk factors of the institutions. . . . One problem regulators have now is they don't know about these problems until they are out of control.
If management is willing to take on greater risk, they should pay for [deposit insurance] with a higher premium