Having just narrowly completed a $451-million recapitalization that saved the big savings and loan from government seizure, Glendale Federal Bank now faces another daunting task: making a profit.
Though no longer threatened by regulators, the nation’s fifth-largest S&L; is still stuck in California’s depressed economy and real estate market. Glendale’s ratio of delinquent loans to total loans remains close to 5%, versus an average of less than 3% for the S&L; industry in Southern California. And Glendale’s capital, while now safely above minimum regulatory levels, doesn’t provide a comfortable cushion in a sagging economy. “There is a point clearly where economic forces could sink the company,” admits Richard Fink, Glendale Federal’s chief counsel and senior executive vice president.
So that’s why Glendale’s chairman and chief executive, Stephen J. Trafton, is in a hurry to find a way to make the thrift profitable and to boost its capital reserves.
What Trafton, 47, has going for him is a tight ship with $18 billion in assets, a trimmed-down but experienced crew of 3,700 workers, and 215 established branches in California, Florida and Washington state. Glendale’s loan portfolio--now consisting mainly of home mortgages--is in better shape than a few years ago, partly because Trafton dumped a lot of troublesome commercial loans and real estate investments.
“Glendale has a pretty good management and branch system,” says Sheldon Grodsky, an investment banker in South Orange, N. J. Grodsky has been disappointed with Glendale’s stock, which has fallen since it started at $9 a share after the recapitalization plan went through in early September. The stock closed Monday at $6.75. Still, Grodsky says that if Glendale can stay in capital compliance, “they have a reasonable chance for recovery.”
One move that Trafton is said to be pursuing to boost capital and operating efficiencies is a merger with California Federal Bank of Los Angeles, a rival S&L; with assets of about $16 billion. Neither side will comment publicly, but observers say CalFed is cold to the idea, although these two struggling institutions have about 70 overlapping branches. But in the long run, analysts agree that neither S&L; may be quite big enough to stand on its own as the California banking industry heads toward further consolidation.
Trafton isn’t ruling out the possibility of a merger. But for now, Trafton says he’s focusing on marketing. His strategy: Forget cash machines and operate like a friendly neighborhood bank. To do this, Trafton has each teller tracking up to 200 customers and marketing more products such as mutual funds and annuities.
“When you walk into one of our branches and have been there any time at all, you will be recognized and called by name,” says Trafton. He also promises shorter lines, telephone calls on customers’ birthdays and better operating hours, set largely by branch managers. And Trafton’s stressing this friendly image in a new publicity campaign, with newspaper ads like this one: “Just like the big banks, we have cold, impersonal tellers who don’t talk to you. (We call them ATMs.)”
Marketing is something new for Trafton, whose 25-year banking career has been mostly on the finance side. A zoology major in college, Trafton wound up in banking by taking a summer job as a teller at Seattle-First National Bank in 1968. He quickly rose to vice president and spent the next 11 years there managing the commercial bank’s money market department. After leaving Seattle, he had a stint with a Wall Street brokerage before gaining a reputation as a turnaround specialist while serving as a treasurer at two ailing institutions, San Francisco’s Hibernia Bank and Buffalo’s Goldome.
Trafton, an accomplished mountaineer, joined Glendale in mid-1990 as chief financial officer. A year later he became vice chairman, then president and chief operating officer. Trafton became chairman and chief executive in March, 1992, when Norman Coulson abruptly resigned from those posts amid continuing losses.
Trafton now says he wants to be known as a marketer. “I intend to stay (at Glendale) until I’m known not only as a turnaround specialist but a marketer.”
Trafton appears to be on the right track. Since the recapitalization, Trafton says he’s won back 40% of the 100,000 customers lost during the thrift’s three shaky years, partly by offering them free checking and bonus rates of up to 0.15 percentage points on certain certificates of deposit.
But with such rates comes a cost. For some time now, Glendale has been paying higher interest rates than its rivals on most deposits, including CDs and money market accounts. Glendale’s regular savings accounts, for example, now pay a rate of 2.5%, compared with 2.1% at most other major S&Ls; in the state. Trafton says Glendale had to pay up to prevent a bigger exodus of depositors during its troubled period.
But while good for depositors, the higher rates have cut away at Glendale’s main source of revenue. And just how much can be seen in Glendale’s net interest margin, or the spread between what it pays on deposits and charges on loans. As of June 30, Glendale’s net interest margin stood at 2%, versus an average of 3% for the 10 largest S&Ls; in California, according to the banking research firm Sheshunoff Information Services in Texas.
Trafton, however, says he’s begun to nudge down interest rates closer to industry averages, and that should eventually boost interest income. Trafton also sees more revenue from re-entering the apartment lending market and offering new credit card products and financial services like tax preparation help.
All this, Trafton says, should help Glendale return to profitability by June.
Glendale’s rivals like Trafton’s marketing ideas, but they say a lot of S&Ls; are striving to be the friendly neighborhood bank. “They are all good ideas, but they’re certainly far from unique,” says a senior executive at a rival California thrift, who declined to be named.
But if Glendale Federal succeeds--as many analysts think it will--Glendale will have pulled off a remarkable rescue of an ailing financial institution that, only a few months ago, seemed headed for extinction. Battered by bad loans, mostly real estate-related, Glendale lost $418 million in its last three fiscal years. In its first quarter that ended Sept. 30, Glendale posted another $19.9-million loss. All of which left the thrift about $400 million shy of minimum capital requirements. The federal Office of Thrift Supervision first gave Trafton a June 30 deadline, then Aug. 31 to shore up its capital.
The recapitalization was actually completed in September, when the S&L; raised $451 million in new equity. The overhaul included the merging of Glendale with its former parent, Glenfed Inc., exchange of bonds for common stock and the issuance of new stock. It was a tough deal to sell to Glenfed shareholders because for every 100 shares they owned in the old S&L; they wound up with only four shares after the reorganization. But Trafton got their support anyway, as well as commitments to buy new Glendale shares from about two dozen institutional investors, including the billionaire Bass family of Texas.
“He did perform a minor miracle with the recapitalization,” says Ken Frankel of Drake Capital Securities in Santa Monica. But Frankel adds that restoring earnings at Glendale is another matter. “If real estate prices drop another 25%, it won’t matter whether he calls Glendale a community bank, a personal bank or a super bank.”
Trafton thinks the Southern California real estate market and economy have bottomed out. But if he’s wrong, Glendale Federal will probably see a fattening of non-performing assets--loans in default, plus more real estate it is forced to take on through foreclosure. And that would force Glendale to put aside more cash reserves to cover those anticipated loan losses.
Glendale Federal hopes to avoid adding to its non-performing assets, which totaled $905 million as of Sept. 30, representing 5% of its total assets. By contrast, troubled CalFed has a non-performing assets ratio of 7.4%. At Great Western Bank, the nation’s second-biggest S&L; based in Chatsworth, that ratio was 3.75%; and is a mere 1.32% at Golden West Financial, the unusually successful Oakland-based parent of World Savings and Loan, the country’s third-largest S&L.;
But in a positive sign, Glendale’s loan-loss provisions have been declining steadily this year as have Glendale’s non-performing assets, which peaked at $970 million in March. Glendale’s $10-billion loan portfolio still has about $2 billion worth of non-residential loans, which have been hammered even worse than the residential market. Yet those non-residential loans are still down from $2.6 billion three years ago. And in the last three years, Trafton has disposed of more than $1 billion of commercial asset-based loans and real estate investments.
Trafton has also cut more than $100 million from Glendale’s operating budget. He slashed employment by 40%, to 3,700, cutting several layers of management and doing away with jobs in places like the S&L;'s video department. Trafton also got rid of the company’s fleet of 40 cars, executive dining room and club memberships. This year, the company saved $150,000 in printing and mailing costs by substituting government filings for annual reports.
As a result, Glendale’s general and administrative expenses, as a percent of average assets, was 1.56% as of June 30. While trailing industry leader Golden West (0.91%), Glendale’s cost ratio was lower than Great Western (2.59%), CalFed (1.79%) and Irwindale-based Home Savings of America (1.65%), according to Merrill Lynch & Co.
Analysts say they expect Trafton to make even more expense reductions, although for a while costs could rise as Trafton implements his new marketing strategy, which includes a bigger advertising campaign, including television spots, for next spring.
Also, after the recapitalization, vice presidents and above got raises for the first time in two years, averaging 4% of their annual pay. There was also a special $2-million bonus that went to four executives for completing the recapitalization, including $1 million to Trafton on top of his annual salary of $680,000.
Shareholders complained about the timing and amount of the bonuses. But some analysts said Trafton was worth every penny of it. “He brought Glendale back from the dead,” said Bert Ely, a thrift analyst in the Washington, D. C., area. “Now that he’s met that challenge,” Ely said, “the question is how he’s going to come out of it.”