Analysts Wary : S&L;'s Bold Moves Speed Its Growth
Patrick D. Bowlen, owner of the Denver Broncos football team, took a look at Woodland Hills-based Investment Savings & Loan Assn. two years ago and decided to try to buy it.
“We felt they had a very attractive portfolio,” Bowlen said. “They weren’t into a lot of high-risk investments.”
But in mid-1984, just when Bowlen was supposed to complete the acquisition, he started having second thoughts and backed out of the deal. Bowlen said that, although he remained impressed with Investment Savings and its management, he became wary of the harm that rising interest rates could do to it and other S&Ls.;
Bowlen may have been prescient. Investment Savings and its subsidiaries lost money for the first time in six years during the fiscal year ended March 31, chalking up a shortfall of $740,844.
At the same time, Bowlen’s assessment of the S&L;'s management as conservative may be at odds with some of the ways its executives have tried to improve the institution’s financial condition.
Many Play It Safe
After taking big losses, many banks and savings and loan associations play it safe. They typically pull out of risky new ventures and seek sanctuary in the stable and profitable lines they know best.
But Investment Savings, which is required to increase its relative net worth over the next four years to meet regulatory standards, is relying heavily on aggressive new strategies that some analysts consider chancy.
For example, it is using a network of agents and brokers in Central and Southern California to recruit loan customers and is operating a so-called money desk to bring in deposits of $100,000 or more.
Gerry Findley, a bank consultant and editor of Findley Reports, a banking publication, maintained, “They’re just growing too damn fast.”
Investment Savings officials cite the S&L;'s financial recovery over the last several months and its nearly unblemished performance since opening in 1978 as evidence of their ability to avoid trouble.
Overcome a ‘Tough Year’
“We’ve had one tough year and we’ve overcome that quickly,” said Ted C. Hill, the S&L;'s ruddy, white-haired president.
Not all of Investment Savings’ moves have been unconventional. It has followed the path of many other S&Ls; by forming subsidiaries in businesses related to real-estate lending. Investment Savings also is re-emphasizing home mortgage lending, the traditional province of the S&L; industry.
Investment Savings--guided since its inception by a group of San Fernando Valley business executives including Herbert F. Boeckmann II, the owner of Galpin Ford--never has been one to take it slowly. It had only $31.6 million in assets 3 1/2 years ago. By the end of June, it was bigger than any of the banks based in the Valley and, with $289.8 million in assets, was the second-largest S&L; in the area.
That growth stemmed chiefly from Investment Savings’ aggressiveness in arranging commercial real-estate loans. It became the lead lender for an array of hotel and office-building projects inside and outside of California.
Fell Into the Red
But, after five straight years of profits, Investment Savings ran out of luck. It fell into the red during its last fiscal year because of some relatively modest loan losses, slackening loan demand, unprofitable new subsidiaries and past accounting mistakes.
Instead of slowing down and sorting out the problems, Investment Savings has been trying to maintain rapid growth by reshaping itself.
“We’re trying to be ahead of the game,” said Investment Savings Chairman Robert A. Nordskog, a Van Nuys businessman and record-holding power boat racer. “We’re not the follower.”
Investment Savings’ revised strategy actually started more than a year ago, when it began bringing in a group of four, ostensibly more qualified, senior executives to assist Hill in daily operations.
Among the more conservative moves taken by the new management has been to steer the S&L; away from the currently soft market for commercial real-estate lending. Instead, Investment Savings is concentrating on home mortgage lending, a more stable and traditional line of business for S&Ls.;
Uses Own Appraisers
Hill said Investment Savings established a real-estate appraisal subsidiary partly out of self-defense. Stung in the past by what they believe were inflated appraisals, Investment Savings executives now use their own appraisers to assess real estate for which they are considering making loans.
“At first we didn’t think we could afford to have an in-house appraiser. Then we found out we couldn’t afford not to have one,” Hill said.
Hill said about half the business from the real-estate appraisal unit, founded last year, now comes from other financial institutions. Investment Savings’ 18-month-old loan-funding unit also splits its time about evenly between its parent company and outside customers.
That subsidiary inspects real-estate projects for lenders to determine whether contractors are meeting the specifications for their jobs. When the loan funding company finds that part of the project has been properly done, it approves payment for the work.
Investment Savings also activated a mortgage-banking arm this year that sells the S&L;'s mortgage loans to other financial institutions. The idea is to sell the loan at a profit and still draw income for serving the customer without bearing the risk of carrying the loan.
Way to Sidestep Curbs
The mortgage-banking operation, by increasing Investment Savings’ profits without adding to its loan portfolio, gives the S&L; a way to sidestep regulatory curbs on its growth.
Because of its relatively low net worth, a financial institution’s cushion against losses, Investment Savings is in a category of S&Ls; that are discouraged from increasing their assets by more than 15% annually.
As of July 31, Investment Savings’ net-worth-to-liabilities ratio was 2.2%. Generally, regulators want S&Ls; to maintain net worth ratios of at least 3%. Investment Savings says it will not be required to reach that level until the end of 1989.
Investment Savings’ more aggressive, and perhaps more risky, moves have included the formation of the loan agent network and the money desk.
The loan agent network consists of 10 representatives of the S&L; scattered in the southern half of California, in communities such as Atascadero, San Luis Obispo and Pacific Palisades as well as in the San Fernando Valley area.
Real Estate Contacts
By establishing contacts with real estate brokers, they try to draw home buyers looking for mortgages to Investment Savings.
Hill said his staff reviews the loans to ensure their safety. But Pam Findley-Flor, president of Findley Reports, said small S&Ls; rarely are equipped to closely scrutinize loans outside their home territory.
“They need to get their act together before they branch out all over the state,” she said. “The CEO can’t be all over the place.”
Analysts particularly questioned the wisdom of Investment Savings’ year-old money desk. The entire operation consists of two people who call on potential big depositors to sell them on the idea of putting their money into Investment Savings.
Although the primary enticement is high interest rates, Hill said that, in the long run, a money desk is a cheap way of attracting funds because it requires such little staffing. He noted that the money desk already accounts for 20% of Investment Savings’ roughly $280 million in deposits.
The other 80% comes from Investment Savings eight branch offices, where many of its 160 employees work.
Some analysts warn that money desks make for volatile deposit bases. They say that big depositors are quick to pull their money out if another institution offers them higher interest or greater security.
“It’s hot money,” said Findley, the bank consultant. “It’s money they get because they pay a little bit more interest.”
But the loan agent and money desk, along with the new subsidiaries, appear likely to become increasingly important to Investment Savings. Hill said he is working on plans to open up as many as five Investment Savings offices in other large markets in California, staffed primarily with small numbers of loan agents and money desk specialists.
“What we’re hoping is to prove this concept is viable and then duplicate it over time,” Hill said.
A key advantage of the plan, Hill noted, is that it would enable Investment Savings “to reposition” itself to “so we could shrink or grow or go with whatever is the tide at the time.”
Investment Savings’ strategy for the future, however, is still an open issue. One matter needing to be resolved is whether it should keep all eight branches, six of which are in the San Fernando Valley area. Hill said he is committed to keeping open all of them open, but Nordskog predicted that some will close.
Although Hill discounted the likelihood of Investment Savings being acquired or making major acquisitions soon, Bowlen, who besides owning the Broncos has extensive interests in real estate, oil and gas, said he believes the S&L;'s officials “weren’t adverse to selling if they got their price.”
For now, Investment Savings is reporting improved financial results. Hill said the new real-estate appraisal and loan funding subsidiaries recently turned profitable.
Its profits were a scant $149,770 in the quarter ended June 30, down 64.1% from the same period last year. However, Hill said, Investment Savings made $185,000 in July alone.