Southland’s Economy Gives Green Light

H.F. Ahmanson & Co.’s offer to acquire Great Western Financial Corp., whether it succeeds or fails, tells us that this region’s economy and real estate market are looking better than they have in years. That’s why companies like Ahmanson can make ambitious plans.

And the prospective deal hints, too, at Southern California’s future as a beehive of savers, consumer borrowers and small businesses, a place where residential real estate, and thus mortgage lending, will be an attractive proposition once more.

Irwindale-based Ahmanson, the nation’s largest savings and loan with $50 billion in assets, sees its future as a major power in consumer and small-business lending, as well as in mortgages, if it can acquire Chatsworth-based Great Western, a $43-billion-in-assets giant in its own right.

That’s why Ahmanson offered $6.5 billion in stock for Great Western. And it is also why Ahmanson in the last year has invested millions to create an automated mortgage lending system and why it hired key executives from the old First Interstate bank who are skilled in consumer markets and cash management services for small business.

Simply put, the big savings and loan hopes to make a comeback in mortgages, after watching its mortgage loan volume decline from more than $2 billion a year to barely $1 billion in the early ‘90s. Competition from new kinds of mortgage lenders cut into its business.

At the same time, Ahmanson’s consumer loan assets have risen to $1 billion in two years and are growing at $700 million a year. Sales of mutual funds and other investment products are increasing.

Great Western shares Ahmanson’s vision of becoming a broad-based consumer and small-business bank. It too is upgrading its mortgage computer system and building up checking account and lending services.

The only question is whether Great Western wants to go forward as a partner of Ahmanson or as the acquisition of an out-of-state purchaser--perhaps Seattle’s Washington Mutual Inc.

That Great Western will sell to someone is nearly certain, say analysts and other bankers. Great Western Chairman John Maher is described as “waiting for a price to sell out and go duck hunting.”

Great Western, however, is quietly mulling its options. An out-of-state acquirer theoretically could preserve more local jobs in this region.

The Ahmanson choice would create a $93-billion-in-assets giant, the largest financial services company based in Southern California, following First Interstate’s 1995 purchase by San Francisco-based Wells Fargo and Security Pacific’s earlier sale to BankAmerica.

Is locality important? Yes, it would be good for Southern California, says a local bank president, adding, “Ahmanson has always had more pride than other companies that it was located in the Los Angeles area.”

Indeed, Ahmanson Chairman Charles Rinehart repeatedly called attention to his company’s local ties during a press conference Tuesday.

More than sentiment is involved. Ahmanson’s automated mortgage system, which allows the company to receive, process and approve a mortgage application in two hours, would work more efficiently if it could process Great Western’s 4,000 or so mortgage loans along with Ahmanson’s own 7,700 loans.

And efficiency would help the combined company compete with the mortgage companies that have come to dominate the home loan field: Pasadena-based Countrywide Credit, Minneapolis-based Norwest Corp., Providence, R.I.-based Fleet Financial as well as Bank of America, California’s largest mortgage lender.

Those companies took the lead by creating low-cost operations to funnel capital market funds to home mortgages, which are then repackaged as government-backed mortgage certificates. Lending institutions collect and pass on monthly mortgage payments but no longer hold mortgages on their balance sheet.

It’s a world that changed long ago from Southern California’s growth period, when the Ahmansons and Great Westerns financed mortgage loans with savings deposits. They and others had to adapt fast in the 1970s and early ‘80s as deposit interest rates were deregulated and savings and loans exploded with disastrous loans.

Ahmanson and Great Western did adapt. And today they see improving business and real estate in California and they want to go forward.

Both see opportunities in services for small business. Ahmanson Executive Vice President Jan Cloyd, a refugee from First Interstate’s sale to Wells, is a specialist in cash management, the service above all that small-business people want their bank to provide. Ahmanson President Bruce Willison, also a transfer from First Interstate, is concentrating on building up consumer lending and investment business.

Great Western too has hired such banking specialists in recent years in an attempt to shift from overdependence on the mortgage field.

Yes, but if that’s the case, are the two S&Ls; wise to stay in mortgages--low-profit businesses where they have lost market share? The answer is it’s wise enough if they can keep costs down because mortgages can help them attract customers, to whom they can offer other services.

The vision of savings and loans as consumer banks is becoming widespread. Congress and regulators in Washington are about to change S&L; charters to create a category of consumer and small-business banking.

S&Ls; could create a more consumer-friendly banking style, free of the hassles that giants such as NationsBank impose on their customers, says Michael Morrow, of Morrow Group, an Austin, Texas-based bank consultancy.

Friendly can mean competitive, too. Ahmanson’s ratio of expenses to assets, at 1.9%, is very competitive with the 2.5% expense ratio of most banks--a fractional difference that amounts to millions of dollars in costs.

Ahmanson and Great Western could be formidable together and good for Southern California too. Much depends on the Chatsworth company’s response.

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The State of Thrifts

The savings and loan industry share of the mortgage market has declined sharply in the last decade, but growth in new lending businesses, a recovery in real estate values and a dramatic consolidation within the industry have brought thrifts’ profits up from the depressed years of the early 1990s.

Market Share

Percentage by type of company of mortgage originations:

1980

Thrifts: 49.7%

Mortgage companies: 22.0%

Commercial banks: 21.5%

Other: 6.8%

1996*

Mortgage companies: 57.1%

Commercial banks: 23.5%

Thrifts: 18.8%

Other: 0.6%

Number of Thrifts

In thousands:

1996*: 1.4

Industry Profit

In billions:

1995: $5.7

* As of Sept. 30

The Biggest S&Ls;

H.F. Ahmanson, parent of Home Savings, is the largest thrift in the United States based on assets. Its target, Great Western, ranks No.3. The $6.5-billion offer would result in the closure of 180 branches in California. There was no estimate of job losses, but Ahmanson said Great Western employees would bear the blunt of the cuts. If the two thrifts merge, their assets will total a whopping $92.9 billion, more than double those of their closest competitor.

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Assets Company Headquarters (billions) H.F. Ahmanson Irwindale $50.0 Washington Mutual Seattle. 45.0 Great Western Financial Chatsworth 42.9 Golden West Financial Oakland 37.7 California Federal San Francisco 31.0 Dime Bancorp New York 19.5 Standard Federal Bancorp Troy, Mich. 15.7 Glendale Federal Glendale. 15.6 Charter One Financial Cleveland 13.9 GreenPoint Financial New York 13.3

*--*

Sources: Company reports; Department of Housing & Urban Development; Mortgage Bankers Assn. of America; Sheshunoff Services; SNL Securities

Researched by JENNIFER OLDHAM, JANICE JONES and ROB CIOE / Los Angeles Times