SAVINGS & LOANS : As Earnings Skyrocket, California’s Big 10 Are Pursuing New Strategies

Marion O. and Herbert M. Sandler, the wife-and-husband team that runs World Savings & Loan in Oakland, still readily recall the rock-bottom times of 1981 and 1982, when heavy losses washed away a quarter of the company’s net worth.

“We had had 14 straight years of higher earnings,” Marion Sandler said during an interview in her husband’s spartan corporate office overlooking Lake Merritt. “It was very traumatic for us to lose money.”

The Sandlers are not experiencing those traumas today. Golden West Financial, World Savings’ parent company, earned $160 million last year--four times what it made in 1980--and $47.8 million in the first quarter of 1986.

World Savings is on the leading edge of an earnings explosion at California’s major savings and loan companies, the 10 biggest of which made a total of more than $1 billion last year, thanks to rising loan volumes and dropping interest rates. Four years ago, these same financial institutions lost almost $200 million.

The comebacks have been somewhat lost amid the din of bad news about the savings and loan industry, including major real estate loan problems in California. Of 25 money-losing S&Ls; placed under special federal regulatory supervision last year, two-thirds were based in California. The 25 lost nearly $1 billion in 1985.

Helping insulate the big S&Ls; from their sickly brethren has been a combination of manpower--especially their large staffs of appraisers and experienced loan officers--and conservative lending practices, which so far have protected most of them from large numbers of non-earning loans. With the glaring exception of American Savings & Loan, the problem-loan levels of California’s big savings and loan firms are far lower on a percentage basis than in the industry at large.

The 10 biggest California thrifts had a return on shareholders’ equity of more than 19% in 1985, compared to the industry average of 12.2%, according to the U.S. League of Savings Institutions, a trade group. The return on assets for the 10 was 0.72%, almost double the industry average, the league said.

Seek New Identities

Very much intertwined with this financial performance is the story of how the big savings and loan companies are scrambling to carve out new identities to ensure that the hard times of 1981 and 1982 are never repeated.

Their strategies are being acted out on a kind of public proving ground that will determine where the savings and loan industry is going in the next decade and beyond. At stake is the way S&L; customers will buy financial services in the future and to what degree investors will be rewarded by new strategies in a deregulated banking environment.

The changes are occurring in the wake of the early 1980s financial deregulationthat allowed--or expanded the authority of--S&Ls; to make consumer, commercial and adjustable-rate mortgage loans and to offer checking accounts and market-rate savings accounts. Before the decade began, regulators dictated how much interest they could pay savers, and their loan portfolios were largely filled with long-term, fixed-rate mortgage loans.

“There are lot of different corporate strategies, but it’s too early to tell which is the best,” said Roger Lindland, chief financial officer of Great American First Savings Bank in San Diego.

The early results are in from Wall Street, though, and most of the votes so far are going to the parent companies of Great Western Savings (Great Western Financial), Home Savings of America (H. F. Ahmanson) and World Savings (Golden West).

“I believe when the dust settles, they are going to be the first three across the finish line,” said Jonathan Gray, analyst for the New York investment house of Sanford C. Bernstein & Co.

Another grouping is made up of Great American and Home Federal Savings & Loan, archrivals in San Diego County and favorites with analysts.

Then there are First Nationwide Financial, the Ford Motor subsidiary with lofty national ambitions, and the parent companies of Glendale Federal Savings and California Federal Savings, both fighting for recognition as GlenFed Inc. and CalFed Inc.

Far down in the pack, according to analysts and competitors, is the parent company of Gibraltar Savings, which has retreated from some diversification attempts. Bringing up the rear is Financial Corp. of America, whose American Savings subsidiary remains saddled with nearly $2 billion of problem loans.

Led Way on ARMs

What happens at these 10 big California S&Ls; has an industry impact far beyond their number. “It’s like the auto repair industry in Kilgore, Tex., looking at a Ford or General Motors,” said the chief executive of a large Midwestern savings and loan. “They’re in another league.”

Altogether, there are 219 savings and loan firms in California and 3,245 nationwide, but the top 10 accounted for 15% of the national industry’s assets and 29% of its net income in 1985, according to the figures of the U.S. League of Savings Institutions. They have branch offices in every corner of California and in states from Washington to Florida.

They have led the way in making mortgage loans that have adjustable rates, a move that has not always made them popular with consumers but was considered a must by investors because it helped protect their earnings from interest rate movements. (The S&L; industry lost nearly $9 billion in 1981 and 1982 because loan portfolios were filled with long-term, fixed-rate mortgages that became big money-losers when soaring interest rates drove up deposit costs.)

The big S&Ls;, in a move toward diversification, have led the way in buying companies that have nothing to do with mortgage lending--a move that they hope will help when their savings and loan operations encounter tough times again.

CalFed paid $120 million for a major insurance company, while Great Western Financial bought a life insurance and consumer finance company for $165 million. “We used to look alike a few years ago, but we’ll never look the same again,” said James Montgomery, chairman of Great Western Financial in Beverly Hills. “It’s important for people to know that.”

On the consumer side, it has indeed become a mixed group.

Companies such as Great Western Financial, First Nationwide Financial and Home Federal Savings now like to think of themselves as retail consumer banks, offering a range of financial services.

On the other hand, World Savings has not even installed automated teller machines, a fixture at most financial institutions today. “Our target audience is older, and they don’t trust this equipment,” Marion Sandler explained.

Move Into KMarts

Home Savings of America’s parent company has gone national by buying sick savings and loans, and it is now sometimes referred to as the Citicorp of the thrift industry. It has about 300 retail branch offices in seven states.

First Nationwide Financial, which has established a national network of franchise S&Ls;, plans to put hundreds of branch offices in K mart locations around the country in the next five years. Ten are already operating in San Diego County, and 27 others are opening this year in the Los Angeles area.

“The big question is: How are financial services going to be distributed to the middle class?” First Nationwide Chairman Anthony Frank said. “I don’t know--but it’s going to be differently than it is now.”

Customers, meanwhile, do not appear very turned on by all the changes.

According to a recent survey by marketing consultant Richard Kremer of Fullerton, S&L; customers are still far more interested in the financial health of an institution than in whether they can obtain stock brokerage services there.

“I think the savings and loan industry is moving too fast for the public,” said Kremer, whose survey included 1,200 people in Southern California who have at least $10,000 in a savings and loan.

Four Different Names

On the lending side, Great American is the fastest growing of the bunch, having acquired an ailing S&L; in Los Angeles and a healthy one in Arizona in recent months. Its assets ballooned from $8.2 billion to $10.6 billion in the first three months of 1986.

Great American has the distinction of having had four different names in 2 1/2 years as it was in the process of switching from federal to state charter and expanding its turf beyond San Diego County. Until 1982, it was known as San Diego Federal Savings & Loan; it became Great American First Savings Bank in 1984 after briefly using two other, similar names.

American Savings remains the poorest financial performer of the 10, though it has made money in the past two quarters by selling assets at a profit.

The Stockton-based S&L; remains hamstrung by foreclosures and delinquent loans that have only become more severe in the past two years. The banes of its portfolio are condominiums in Texas and California. Declining mortgage rates have only served to make single-family houses more affordable, company officials say, at the expense of the condominium market, and plunging oil prices have hurt the Texas economy.

“We have continued to see the real estate values go down, and we’re not sure how far down is down,” said William J. Popejoy, chief executive of American Savings. Popejoy now says it may be as long as seven years before American Savings returns to financial health. His earlier estimate was five years.

To be sure, even the good shops have made miscalculations.

Most Capital

Heavy losses, which slashed third-quarter profits to $1.44 million, forced Home Federal Savings to sell its credit card operations. Despite the setback, Home Federal remains the best-capitalized of the group with a ratio of shareholders’ equity to total assets of more than 7%.

“If capital is king, they are the emperor,” says Jerome Baron, an analyst for First Boston Corp. in New York.

Great Western Financial was roundly rebuffed this year when it tried an unfriendly takeover of the parent company of Fidelity Federal Savings in Glendale. But Great Western says it won’t drop the breach of contract suit it filed against Fidelity after cancellation of a friendly merger agreement between the two S&Ls; last year.

“One thing we are not going to do,” Montgomery, Great Western’s chairman, vowed, “is turn and walk away.”

The big California savings and loans are run by executives whose reputations do not extend much beyond their industry--with some minor exceptions.

Montgomery played on a UCLA volleyball team that won the national championship 30 years ago. And Home Federal Savings President Robert Adelizzi was an honorable mention All-American center and linebacker on the Dartmouth College football team in the late 1950s. (He went on to play for a U.S. Marine team that included a young Bill Cosby, today’s widely acclaimed comedian, actor and father, as trainer and player.)

What they lack in celebrity, though, is more than compensated for by their clout in trade group and regulatory matters. Six of the 14 board members of the Federal Home Loan Bank of San Francisco, for example, run large California savings and loan firms.

“They’re a powerful and influential group, and they’re not afraid to to give their opinions, to put it mildly,” one investment banker said.

‘Establish Policy’

They do much of their lobbying through the Chicago-based U.S. League of Savings Institutions. “I think their influence is overwhelming,” one Washington lobbyist said. “They establish policy. There’s no doubt about that.”

The most influential chief executives of the group include Montgomery, Richard Deihl at H. F. Ahmanson, Anthony Frank at First Nationwide, Gordon Luce at Great American and Herbert Sandler at World. (Marion and Herbert Sandler are both listed as chief executives of Golden West Financial, the parent firm.)

One of the more unusual management teams not usually included in the inner circle is located in the Wilshire Boulevard headquarters building of CalFed.

CalFed’s chairman, Robert Dockson, is a former professor and dean of USC’s school of business. The company’s chief executive, George Rutland, was a commercial banker for 28 years at Citicorp and Crocker National before moving to CalFed in 1982.

A corporate maverick, CalFed was one of the few large California S&Ls; to defend the practice of using major brokerage firms to raise deposits a few years ago, a practice harshly criticized by regulators as encouraging reckless loan growth.

Controversy Over Ads

But CalFed found how hard it is to buck the flow when it began an advertising campaign last year that chided some of its big competitors for using scenes of natural wonders to symbolize financial stability. “Pretty pictures of redwoods are nice,” the ads read. “But if anyone thinks they make people feel better about their money, they’re barking up the wrong tree.”

The ads were eventually halted because of criticism from competitors, Rutland said.

CalFed and GlenFed are among the most diversified of all the big savings and loans. Though both make money and have ample net worths, their different strategies have yet to generate widespread interest on Wall Street.

GlenFed has been viewed as an unexciting giant, while CalFed is known as the savings and loan that looks a lot like a commercial bank.

GlenFed has been dogged by several factors, including an initial stock offering in 1983 that came at the tail end of a glut of new S&L; issues and raised much less capital than had been hoped.

Soon after the new issue, interest rates went up and GlenFed’s stock fell to less than half its initial value. The stock has been trading higher in recent months but at still less than its $34.45-a-share book value.

Company officials, though, say they have developed a unique strategy that involves ownership of companies in each phase of mortgage lending--from sales to title insurance to lending the money. It is the so-called vertical integration approach to home lending.

“No one has gone as far as we have in putting them together,” said Keith Russell, chief operating officer of Glendale Federal Savings. About 20% of Glendale’s loan volume in Southern California comes from brokers at its Realty World franchises.

More Diversification

CalFed, in addition to the insurance company that now accounts for about 10% of income, has acquired a thrift and loan and an investment management company since 1981. Its personality, similar to a commercial bank’s, reflects the dozens of ex-bankers on the staff and a commercial-loan portfolio of $600 million, highest among the California S&Ls.;

CalFed executives say the firm eventually wants as much as 40% of its income to come from non-savings and loan operations. “We believe we will face another crisis,” Dockson, the chairman, said, “and we want to survive much better than we did in 1981 and 1982.”

But CalFed is still trying to live down a third-quarter performance in 1984 when a sudden jump in interest rates unexpectedly sent earnings plunging to 1 cent a share. “It put a cloud over the stock that I think is still a factor,” said Allan Bortel, financial analyst for Shearson Lehman Bros.

When the dust does settle (as analyst Gray put it), many experts believe that it will be management quality, as much as corporate strategy, that will determine the ultimate winners and losers.

“It’s a very unique period now,” said Thomas Klingenstein, an analyst for Wertheim & Co. in New York. “Management is more critical than ever. Ten years ago, the regulators ran this industry, and 10 years from now, the successful strategies will be readily apparent.”

HOW CALIFORNIA’S BIG S&LS; STAND

Stockholders Assets Profits equity as % (March 31) (Jan.- Mar.) of assets S&L; (in billions) (in millions) (Mar. 31) H.F. Ahmanson (Home Savings of America) $27.2 $67.8 4.41% Financial Corp. of America (America Savings & Loan) $26.4 $49.1 1% Great Western Financial (Great Western Savings) $25.4 $70.8 4.96% CalFed (California Federal Savings) $19.4 $36.6 5.48% GlenFed (Glendale Federal Savings) $15.5 $21.3 4.69% Golden West Financial (World Savings & Loan) $12 $47.8 4.32% First Nationwide Financial (First Not Nationwide Savings) $11.9 $21.9 applicable Great American First Savings Bank $10.6 $15.7 $3.77% Gibraltar Financial (Gibraltar Savings) $10.5 $8.78 2.37% Home Federal Savings, San Diego $10.1 $23.3 7.16%

Return on Return on average average assets equity S&L; (1985) (1985) H.F. Ahmanson (Home Savings of America) 0.85% 21.2% Financial Corp. of America (America Savings & Loan) 0.19% 25.2% Great Western Financial (Great Western Savings) 0.82% 18.1% CalFed (California Federal Savings) 0.73% 13.9% GlenFed (Glendale Federal Savings) 0.47% 8.68% Golden West Financial (World Savings & Loan) 1.41% 40.6% First Nationwide Financial (First Nationwide Savings) 0.67% 17.5% Great American First Savings Bank 0.61% 12.5% Gibraltar Financial (Gibraltar Savings) 0.41% 17.7% Home Federal Savings, San Diego 0.77% 11%