GREAT WESTERN IS KEEPING ITS BRANDING IRON RED-HOT
While addressing a junk-bond conference sponsored by Michael R. Milken several years ago, Great Western Financial Corp.'s chairman decided to inject a little levity into the proceedings. James F. Montgomery said he had "built a company, if you'll pardon the expression, with an investment grade." He recalls that it took a few moments for the assembled junk mavens, who were promoting non-investment-grade companies with near-religious fervor, to get the dig. "I'm not sure they all appreciated it anyway," Montgomery says.
Probably not. But it's hard to fault him for gloating. Located just down the street from Milken's now-shuttered junk-bond operation in Beverly Hills, Montgomery's thrift has prospered by keeping clear of the sort of high-risk debt and chancy loans that sank many of Milken's customers. That's given Great Western the financial wherewithal to gobble up many of those customers, including two of the most nefarious: Charles H. Keating's Lincoln Savings & Loan Assn. in Irvine, Calif., and Miami-based CenTrust Savings, which made David L. Paul infamous.
HARDY TIMES. At a time when most S&Ls are either dying or limping badly, Montgomery is improbably yet rapidly fashioning a national empire. Since mid-1990, Great Western has swung nine separate deals, adding more than $12 billion in new deposits (table). The thrift, with $39.6 billion in assets, is now the largest in both California and Florida. Although his company is hardly free of loan problems, Montgomery is already working on his next and perhaps biggest deal: Great Western is one of 13 financial institutions that have lined up for a peek at the books of HomeFed Bank. The ailing San Diego thrift is sagging under the weight of more than $2.1 billion in bad loans but boasts 201 branches.
It all sounds pretty flashy for a onetime UCLA volleyball player who started his business career as an accountant with Price Waterhouse. In fact, Montgomery, who has been chief executive since 1979, is continuing to display the same cautious approach that enabled him to sidestep the manias of the 1980s. Typically, Montgomery buys the branches and their deposits, then sells off riskier loans. In the case of failed thrifts, he fobs off all the bad loans on the federal Resolution Trust Corp., which is in charge of the S&L bailout.
FULL SPECTRUM. What's more, with many banks and thrifts unable to afford big acquisitions, Montgomery has found bailouts to be a buyers' market. Consider CenTrust Savings. Montgomery's initial $100 million bid for the Miami thrift was rejected by the RTC in 1989 as too low. But when more generous offers failed to materialize, Great Western's CEO ended up winning CenTrust the following year, even after reducing his bid to $86 million.
Even with a crowded field of potential buyers eyeing HomeFed, Montgomery has no intention of changing his deliberate style. California's two banking behemoths, Wells Fargo & Co. and BankAmerica Corp., are said to be among Great Western's competition. "We don't intend to get into a bidding war," says the 57-year-old Montgomery, an Old West aficionado whose office is decorated with Indian art and cowboy paintings.
Still, that doesn't mean that growth isn't crucial to Montgomery. He isn't content to make Great Western a mere purveyor of home mortgages, like most thrifts. He is out to build a nationwide consumer franchise, more akin to a commercial bank. And he has a head start. For more than 60 years, Great Western has owned a consumer finance subsidiary that now has 512 offices, mostly in the Southeast. During the 1980s, Montgomery broadened Great Western's reach by opening 190 mortgage offices in 21 states. His recent acquisitions will be a key component of what he hopes will be an extensive network that will offer everything from home mortgages to credit cards. He plans, for instance, to introduce new customers to Great Western's small but growing securities business, which offers stocks and bonds as well as 11 of its own mutual funds.
For now, Montgomery's target markets are California and Florida, which he sees as America's two growth states. He also has a small foothold in Washington State and a single branch in Arizona. "We're not giving up on Texas and a few other places, either," he says, although he says he hasn't found anything yet in the Lone Star State.
TROUBLES AHEAD. Despite his careful empire-building, Montgomery has run into several snags. For one thing, operating costs have soared. Great Western now has more than 1,000 branches and consumer credit offices in 31 states, with a total of 14,700 employees. But there has been little demand for consumer loans during the recession. As a result, overhead is up 32% since 1989, while assets have risen by only 6.4%.
Despite Great Western's policy of selling off acquirees' bad loans, its own loan portfolio has had plenty of problems stemming from the sluggish California economy. Nonperforming loans, mostly home mortgages, rose 30% in the first quarter, to $1.8 billion. The loan problems pale next to other California thrifts. But Great Western was forced to add $107 million to its reserves for bad loans. Excluding an accounting gain, the thrift's first-quarter profits fell 37%.
Montgomery argues that such setbacks will be short-lived. With the economy expected to strengthen in the second half, he believes the worst of Great Western's loan problems are over. Moreover, he expects consumer borrowing activity to pick up. "With the deposit base we've built, we're in great shape when the economy rebounds," he says.
Banking on an economic upturn may seem a little risky. That's one reason Great Western's stock still trades at 17 3/4--or eight times earnings--compared with more highly regarded banks that trade at a price-earnings multiple of 10 and above. "I call them survivors, but not yet thrivers," says analyst Joseph A. Jolson of Montgomery Securities Inc.
To Jim Montgomery, that may not necessarily be an insult. At a time when most of Michael Milken's thrive-at-any-cost S&L clients are insolvent or close to it, survival suits him just fine. And if the economy does kick in, he may end up gloating again.GREAT WESTERN'S
CENTRUST SAVINGS $86.0 $86.0
CITY SAVINGS 9.8 9.8
Palm Beach, Fla./
CARTERET 28.0 28.0
LINCOLN SAVINGS 12.1 12.1
PIONEER 5.2 5.2
Clearwater, Fla./March, 1991
THE FIRST 23.4 23.4
AMERIFIRST 27.5 27.5
*13 Florida branches
DATA: COMPANY REPORTS
Ronald Grover in Los Angeles