Out Of The S&L Ashes

Superthrifts are emerging to challenge full-service banks

Until February, Great Western Financial Corp. was a lumbering savings and loan best known for its TV ads with John Wayne waving a branding iron and with Dennis Weaver on horseback. These days, the giant Los Angeles thrift is the takeover prize in a real-life showdown between two S&L heavyweights: Seattle's Washington Mutual Inc. and H.F. Ahmanson & Co in Irwindale, Calif.

The acrimonious battle is emblematic of the high-stakes dealmaking in S&Ls, which has attracted such investors as Robert M. Bass and Ronald O. Perelman. The thrift industry itself, ever since the 1980s crisis, has been in rapid decline. But a small band of "superthrifts" is emerging that could escape that fate. They are busily acquiring other thrifts and community banks in order to go head-to-head with commercial banks. Once-obscure players now on the move, besides Seattle's Washington Mutual, include Charter One Financial in Cleveland, TCF Financial in Minneapolis, and Peoples Heritage in Portland, Me. "These thrifts are already competing successfully with first-tier regional banks," says Caren E. Mayer of Montgomery Securities.

NO PANACEA. With sellers outnumbering buyers, some superthrifts have easily picked up their brethren. By chopping costs of newly acquired prey, they have been able to squeeze higher profits out of mortgage operations--even those with the scrawniest margins. Says Charles John "Bud" Koch, the 6-ft., 6-in. chairman and CEO of Charter One: "There has been a once-in-a-career opportunity for a lot of us to make a huge amount of money by consolidating weaker players."

Acquisitions alone are no panacea. Superthrifts also have moved to cut their funding costs and increase what they earn on that money by moving beyond thrifts' traditional territory of mortgages. Customers at a Charter One branch most likely would not know they were in a thrift. They can easily get a home-equity, car, or boat loan--along with life insurance or mutual funds. William A. Cooper, chairman and CEO of TCF Financial Corp., has created one of the nation's most banklike and most profitable thrifts by targeting the underserved lower middle class. Only 45% of TCF's assets are in mortgages. More important, 53% of its deposits are in low-cost checking, savings, and money-market accounts. If they have only "$500 in a checking account, customers don't care what I pay them [in interest]," says Cooper.

To gain ammunition in their fight to become banks, many superthrifts have hired away top-flight managers who were victims of the bank merger wave. Ahmanson, for one, picked up First Interstate's well-regarded vice chairman Bruce G. Willison--along with 61 branches from First Interstate Bancorp after it merged with Wells Fargo & Co.

EROSION. Most barriers that once gave thrifts a competitive edge have fallen. The emergence of Fannie Mae and Freddie Mac, which pool mortgages and sell them on secondary markets, has eroded profits from the thrifts' once-exclusive niche of mortgage lending. And thrifts have watched their traditional source of funding, certificates of deposit, dry up as consumers have turned in droves to mutual funds. In recognition of this, Congress has lowered the insurance that thrifts pay on deposits--to be more in line with what banks pay. And by 1999, banks and thrifts should have the same charters, eliminating the legal difference between the two entities.

Superthrifts face still other challenges. They are diversifying into an overcrowded bank market. And as the size and price of their acquisitions grow, so does the risk that deals will not be executed well. For Washington Mutual or Ahmanson, winning Great Western should be a coup. But both could stumble. Ahmanson would have to make a sweeping cultural change--it lags in offering bank products--while integrating a giant hostile acquisition. To make money on the deal, Washington Mutual would have to achieve considerable cost savings and boost revenues. "I think a lot [of thrifts] will end up being bought by banks," says James K. Schmidt, executive vice-president at John Hancock Funds Inc.

Charles R. Rinehart, the 50-year-old CEO of Ahmanson, puts the challenge facing thrifts eager to become more like banks in blunt words that John Wayne and Dennis Weaver would appreciate: "It's change or die."