S & L Happy to Be a Homebody : Great Western: Disdaining flashier investments in favor of mortgage loans has helped it amass a record net income of $298 million.
James F. Montgomery, chairman and chief executive of Great Western Financial Corp., doesn’t mind being called boring. As he acquires the remains of failed savings and loans that were considered exciting companies a decade ago, Montgomery thinks that boring looks pretty darn good.
The parent of Great Western Bank, which last month moved its headquarters from Beverly Hills to Chatsworth, has long promoted an image of sturdiness and reliability. In its Western-themed television commercials, first with John Wayne, now with Dennis Weaver, Great Western has presented itself as a good old-fashioned lender, a rock of stability ready to ride to the rescue of the beleaguered consumer.
And with good reason: In 1991, Great Western’s net income more than doubled to a record $298 million, making it the nation’s most profitable savings and loan.
In the early 1980s, when deregulation allowed savings and loans to jump into a host of new businesses such as investing in junk bonds and commercial loans, Great Western stuck with less flashy home mortgage loans. As other thrifts such as Columbia Savings and Lincoln Savings & Loan loaded up their balance sheets with risky investments and then folded, Great Western concentrated on building what Montgomery calls “real capital.”
“We didn’t succumb to the temptations of the 1980s,” said Montgomery, a former Price Waterhouse accountant and Great Western’s chief executive since 1979. “We have stayed with what we know best and that is making home loans.”
A few years ago, “they were criticized for that because it wasn’t cutting edge,” recalled Lawrence Vitale, an analyst at Kemper Securities. “The mortgage business was seen as a dead business.”
But the result of Great Western’s conservatism is now clear: Analysts predict that Great Western’s earnings will edge up again this year to between $307 million and $326 million, and will rise again in 1993.
With $39.6 billion in total assets, Great Western is now the nation’s second largest thrift, behind H. F. Ahmanson, the Los Angeles parent of Home Savings of America. Great Western has 1,118 retail banking, mortgage lending and consumer finance offices in 31 states, and is among the largest financial institutions in both California and Florida.
And as Great Western competes with banking behemoths like the newly merged Bank of America/Security Pacific, it is becoming more like a bank than a traditional savings and loan. It even changed its name in 1987 from Great Western Savings & Loan Assn. Montgomery now likes to call Great Western a consumer bank, which he sees as a giant, multi-service financial institution offering a wide array of products and services to individuals.
But while Great Western certainly looks good compared to the rest of the thrift industry, it didn’t totally escape the mistakes of the past decade.
In the early 1980s, Great Western discarded its usual guardedness and began making commercial real estate loans. It got out of that business five years ago when the market began to weaken, and its commercial real estate portfolio declined from $2.9 billion in 1987 to $1.8 billion in 1991. But some of its remaining loans are troubled, and it’s still in the process of writing some of them off its books.
An even bigger worry is the soft housing market in California, where about 80% of Great Western’s loans are made. Delinquencies and foreclosures have been steadily rising among Great Western’s home loans and, as of March 31, its portfolio of non-performing loans was $1.8 billion, up 31% from a year earlier.
There are more loan problems looming. In the first quarter, Great Western boosted the reserves it sets aside for future loan losses to $78 million, from $30 million a year before, and Montgomery said he has “yet to be convinced” that California’s economy has begun to turn around.
Despite the increased reserves, Great Western logged an 18% profit gain in the first quarter, to $81.6 million from $69.2 million a year earlier, mainly due to an accounting change.
Still, lingering concerns about the future have dampened enthusiasm for Great Western’s stock, Vitale said. It closed Monday at $17 a share, about the same price it traded at three years ago.
Analysts also point out that Great Western’s profit margins are sure to be squeezed since interest rates figure to rise from their present low levels. By comparison, when interest rates fall, a savings and loan typically enjoys an increase in its net interest margin--the difference between the rates it charges borrowers and those it pays to depositors. Great Western’s first-quarter net interest margin was a high 3.89%, compared to 3.02% in 1991’s first quarter.
Montgomery acknowledges that rising interest rates could hurt margins, but argues that Great Western has taken pains to offset its vulnerability to interest rate swings.
Over the past several years, it has used a highly successful marketing blitz to attract more checking accounts, a lower-cost source of depositors’ money than certificates of deposit. At the end of March, 36% of Great Western’s total deposits were transaction accounts (mostly checking accounts), compared to 24% at the end of 1990.
With many banks and savings and loans closing or being merged, it’s a perfect time to capture customers who are relocating their checking accounts, Montgomery said.
Great Western also hopes that these checking account holders will provide a customer base for its other services, including sales of mutual funds and bonds, as well as consumer and home loans.
Such a strategy is likely to be very profitable, said Morrie Reiff, a financial planner at Planned Asset Management Inc. in Encino.
And, ironically, higher interest rates could also help Great Western by creating greater demand for adjustable rate mortgages, said Tom O’Donnell, a thrift industry analyst at Prudential Securities. Adjustable rate loans, pioneered by Great Western and other thrifts in the 1980s, help shield a lender from big losses when interest rates rise.
Overall, Great Western remains one of the healthiest survivors of the devastated S & L business. Among the few thrifts keeping it company is Golden West Financial Corp., the Oakland parent of World Savings & Loan Assn., which is also known for conservative management. Golden West is about 40% smaller than Great Western, but reported a $239-million profit in 1991.
As other thrifts fail, Great Western, which avoided overpriced acquisitions in the 1980s, has been roping in their healthy assets at bargain prices. It has made nine acquisitions in the past two years, including parts of two of the industry’s most notorious thrifts: Lincoln Savings & Loan Assn. in Irvine, formerly run by Charles Keating, who has been convicted of fraud, and Miami-based CenTrust Savings, whose former chairman, David Paul, faces 100 federal racketeering charges.
Montgomery lately has acknowledged an interest in HomeFed Bank, the insolvent San Diego thrift, and has reportedly also eyed CalFed in Los Angeles.
With Great Western remaining on relatively firm ground, the thrift has had lots to brag about lately in its TV commercials. But financial stability is a theme that Great Western has used since the first John Wayne spots were aired in the mid-1970s.
A longtime Wayne fan, Montgomery recalled that when he first approached the actor about becoming Great Western’s spokesman, Wayne was reluctant because he felt that an earlier pain reliever commercial he had done made him look silly. He finally consented after some coaxing from Montgomery and a promise that Wayne could use his own words rather than a script.
After Wayne’s death in 1979, Great Western hired several of the actor’s friends, including Barbara Stanwyck, Maureen O’Hara and director John Huston, to follow up with commercials that were also part tribute to the Duke. Then, in the early 1980s, Great Western hired Weaver, former star of the TV show “McCloud,” and he’s been touting the thrift’s staying power ever since.
“If that’s boring, OK,” Montgomery said. “Part of the definition of boring is being around a long time and doing something people can rely on.”
Great Western Financial Corp. at a Glance Great Western is the nation’s second largest savings and loan, as measured by total assets. Despite the troubles plaguing other thrifts, Chatsworth-based Great Western has remained financially stable because it stuck to its strategy of being primarily a home mortgage lender and avoided riskier investments such as commerical loans and junk bonds. With most of its business in California, however, Great Western remains vulnerable to continued softness in the state’s real estate market.
