Into the Home Stretch : Home Savings Faces Tough Problems as Its CEO Nears Retirement

Richard Harry Deihl--the flinty longtime boss of Home Savings of America--is closing in on retirement at hardly the smoothest of times.

Traditionally one of America’s stablest major financial institutions, Home Savings is going through unsettling turbulence, the result of management missteps and the continued deterioration of Southern California’s economy.

Problem loans, which have burgeoned in recent years, now stand at disturbingly high levels for a financial institution that always has touted its safety and security. Confronting the problems will likely be the final act of Deihl’s 25-year run as chief executive of the nation’s largest savings and loan.

Now 64, Deihl is a clear survivor of a harsh banking environment that has claimed thousands of his competitors in recent decades. As the financial waters churned all around it, Home Savings, with a rich Southern California history, remained an island of stability and a model of adaptability.

Associates say Deihl has always been solidly grounded in beliefs forged by the Depression and later remolded by Home Savings’ legendary former owner, Los Angeles business tycoon Howard F. Ahmanson. (H.F. Ahmanson & Co. is still the name of Home Savings’ parent firm.)

He is among the last of an old line of savings and loan executives--blunt, unpolished, single-minded. And some question if he will fully fade from the behemoth institution with which he has been so closely identified.

Deihl himself says he has no plans to disappear. Though he aims to resign next year as chief executive of H.F. Ahmanson & Co., he intends to stay on as chairman of the board.

“I’m not going to (leave) until the economy has improved,” Deihl said in a two-hour interview at the company’s national headquarters in out-of-the-way Irwindale.

Whatever his longer-term plans, Deihl’s immediate challenge is clear: maintain investor and depositor confidence in the financial institution even as the regional economy continues its swoon and real estate values keep dropping.

Troubled loans at Home Savings have swelled threefold in less than three years and now stand at $2.65 billion--a worrisome 5.57% of Home’s total assets. Most of those problems stem from single-family mortgages, the heart of its lending and the original raison d’etre of the thrift industry.

In California alone, where it makes most of its loans, Home Savings has more than $1 billion in home mortgages whose borrowers have fallen well behind on their payments or had their properties repossessed, company documents say. Its loans on income property also remain a major question mark in today’s depressed commercial real estate market.

What ails Home Savings is infecting other healthy financial institutions, of course. But Home made some lending miscalculations of its own starting in 1989 that continue to cause painful indigestion.

“Our underwriting standards broke down,” conceded Charles R. Rinehart, chief operating officer of H.F. Ahmanson & Co. and Deihl’s 45-year-old heir apparent as chief executive. “We ended up making loans that no one else would do.”

As a result, H.F. Ahmanson & Co. has suffered a fall from grace on Wall Street, where investment analysts once viewed the firm with near universal admiration. Now, most expect mediocre earnings in the next year; its stock has remained flat.

A crucial test may come next spring, when federal banking examiners review Home Savings’ loan portfolio. Critics say the company has yet to set aside a large enough cushion, known as loan-loss reserves, to absorb possible future red ink.

Deihl disputes that, stressing that he believes the lending problems have reached their peak and that adequate reserves are in place.

Nevertheless, the company acknowledged in its latest quarterly report to the Securities and Exchange Commission that “future events may warrant significant additions to the (loan-loss) allowance.”

Ironically, Home Savings’ problems are coming at a time when most of the savings and loan industry--buoyed by sharply lower deposit costs because of falling interest rates--is on the mend. “The industry is recovering,” said Bert Ely, a banking consultant in Alexandria, Va. “A lot of the dead have been buried.”

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To be sure, the current maladies of Home Savings, which makes about $1 billion in home loans a month, are relative.

It earned nearly $189 million in the first nine months of 1992 and has been comfortably--if unspectacularly--profitable since the mid-1980s. Its capital is well in excess of federal regulatory requirements.

At this juncture, only very bearish investors--the “short-sellers” who have bet H.F. Ahmanson & Co.’s stock is going to go down--say the lender is headed for serious trouble.

“It’s not down and it’s not out,” said Jonathan E. Gray, analyst for Sanford C. Bernstein & Co. in New York. “It’s just in its corner for a while.”

Some believe that Home Savings may even be an attractive acquisition target for an aggressive regional commercial bank looking to expand in California--once the state’s economy improves--and challenge Bank of America on its own turf. (Despite a national expansion in the last 10 years, the business base of Home Savings remains in Southern California.)

Home Savings has been a powerhouse in Southern California lending circles since the 1950s, when it emerged from the minor leagues with a flourish amid a postwar real estate boom. It reached $1 billion in assets in 1961, a first for any savings and loan.

In the next three decades, Home Savings grew into a dominant institution, with assets exceeding $47 billion and 378 branch offices in nine states. It forged new trails in adjustable-rate mortgages to lessen its interest-rate risks; its deposit rates are always widely watched by competitors.

As many of those competitors made reckless or ill-conceived investments, Home Savings stood by like a temperance zealot at Mardi Gras. Its loans were sober and straightforward, admirers said.

Actually, that image was over-simplified.

What was accurate--and still is--was that the vast majority of Home Savings’ loans are single-family mortgages. Yet Home was also deeply involved in the more risky--and potentially profitable--areas of income-property lending and housing development.

Now, though, it is phasing out those investments to lessen risk, minimize future losses and accommodate stiffer capital requirements imposed on savings and loans as part of the 1989 taxpayer bailout.

While Home’s origins go back to 1889, its modern history was shaped by Ahmanson, a leading businessman in Los Angeles for decades as well as a noted art collector and superb sailor.

Ahmanson was a shrewd, at times impulsive, opportunist who was quick to spot trends and ably merged the worlds of insurance with mortgage lending.

Ahmanson paid $162,000 in 1947 for what was then known as Home Building & Loan, a one-office thrift with less than $1 million in assets. Through aggressive expansions and mergers, Ahmanson’s financial institution ballooned by 1954 into the nation’s largest thrift.

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Deihl was very much a protege of Ahmanson, who plucked him from an unpromising job selling accounting machines and groomed him during the 1960s to run the rapidly growing financial institution.

Wags, in fact, cracked that Ahmanson ran the company from the grave. “Are those seances or board meetings that they are holding these days at giant H.F. Ahmanson & Co.?” Forbes magazine asked in 1973. (Actually, Deihl ran the savings and loan; William Ahmanson, Howard’s nephew, ran the parent company and its insurance operations.)

Gradually, however, Deihl put his stamp on the entire company. The money-losing insurance operations were sold in the 1980s, while the mortgage lending operations spread nationwide. Deihl assumed total control over the company in 1986, when he became both chairman and chief executive of H.F. Ahmanson & Co.

Like his mentor, Deihl is a relentless perfectionist who keeps the operations focused and the costs down. One former associate described him as a Vince Lombardi-type who shaped a corporate culture suspicious of outsiders.

Indeed, in a business where schmoozing with competitors and lawmakers is common, Deihl has remained largely apart, leaving the glad-handing and lobbying to Robert De Kruif, H.F. Ahmanson & Co.’s vice chairman.

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A rambling speaker, Deihl is neither witty nor glib. “Dick is not a good politician,” said William J. Popejoy, former chief executive of American Savings. “He’s too gruff and too opinionated.”

He is also ultra-cautious--an attitude rooted in his memories of the Depression, when financial institutions failed by the hundreds and deposit-runs were commonplace, because savings were not government-insured.

As Deihl has told the story, his father, Victor Deihl, owned a thrift in Pico Rivera that nearly succumbed to a panic. In a scene reminiscent of the classic movie “It’s a Wonderful Life,” nervous depositors gathered in the lobby of the Pico Rivera Building & Loan Assn., demanding their money after the financial institution next door had failed.

Like the George Bailey character played by Jimmy Stewart, the elder Deihl worked the crowd, assuring them that the institution was sound--even if there wasn’t the cash in the vault to pay off all the customers. He urged them to withdraw only as much as they really needed.

As the bank began to run low on funds, a wealthy local rancher (whose name is no longer precisely remembered) arrived to withdraw $400, only to reconsider after Deihl explained what was happening.

“What the hell, Deihl,” the rancher said. “I’ve know you for a long time.” Whereupon he deposited more than $1,500 in his account, a transaction that saved the day. Victor Deihl’s thrift survived, eventually to be acquired by Home Savings in 1960.

Modern-day Home Savings’ problems have never been so extreme. In times of financial nervousness, particularly in the 1980s, jumpy savers often transferred their money to Home, figuring that it was about as safe a savings and loan as there was.

How Home Savings weathers its current storms will depend largely on how quickly the regional economy bounces back.

But it also is contingent on how well Home rectifies its past errors.

Along with other lenders, Home began in 1989 to push low-documentation (or “low-doc”) loans that appealed to cash-rich buyers--typically salesmen and small businessmen--whose incomes vary widely from year to year.

If borrowers made large down payments--say 25% to 30%--Home Savings typically approved the loans without caring too much about the borrowers’ income. Lending officials believed that the loans were safe bets because the down payments were comfortable cushions in case of foreclosure.

The plan backfired badly.

Driven by top-management’s push for new business at what was the end of a regional housing boom, Home’s loan agents lowered their lending standards and began accepting 20% down payments on the low-doc loans.

At the same time, real estate values in Southern California crested--and began a sharp decline in higher-income neighborhoods.

Foreclosures rose sharply among well-heeled borrowers, their home equity wiped out by falling real estate values and their incomes severely constricted by the recession. Many simply walked away from their high-priced homes.

That meant Home Savings has had to repossess the properties, absorb the resale costs and likely take a loss on the deflated asset. The foreclosed properties now are piling up about twice as fast as they can be sold, Chief Operating Officer Rinehart said.

Morgan Stanley investment analyst Eric I. Hemel, a former savings and loan regulator, estimated that Home has about $4 billion in these low-doc loans--or about 8% of its loan portfolio--on its books.

Deihl says Home Savings has contained the damage from the discredited--and discontinued--loan program, tightening its lending rules. The real question now is whether home values will continue to fall, analysts and investors say.

Though average prices in Southern California have not fallen much from their peaks, prices in higher income neighborhoods--where houses cost $300,000 and up--have fallen 20%-25%, and may drop as much as 40% before the market hits bottom, some analysts believe.

Deihl disagrees. “If real estate prices drop 50%, then we’d have a real problem,” he said. “But I think the likelihood that would happen is remote.”

Another area of potential concern to investors is Home’s huge collection of income-property loans--typically apartments, hotels, shopping centers and industrial parks--valued at more than $8 billion.

Were Ahmanson to sustain losses of 20% on that group of loans, its “survival would be really open to question,” according to short-seller Charles Biderman, publisher of Market Trim Tabs, an investment newsletter.

Deihl termed Biderman’s concerns “just crazy,” saying those loans have adequate reserves.

Deihl does not believe that a turnaround in the California economy is imminent. But he is among the optimists who say it will happen next year.

“If I had to guess,” Deihl said, “I think it would be in the third or fourth quarter of 1993.”

If he’s wrong, Home Savings’ problems are likely to linger.

“The real question is 1994,” observed Peter Treadway, savings and loan analyst for Smith Barney Harris Upham & Co. in New York. “If there is not a turnaround by then, then there is going to be real trouble.”

As America’s largest savings & loan

Assets (in billions) 1992*: $47.52

Home Savings has maintained earnings strength

Earnings (in millions) 1991: $245.8

but its bad loans continue to mount

Funds set aside for bad loans (in millions) 1992*: $255.2

*Nine months ending Sept. 30

Source: Company reports