Great Western Financial Corporation
Great Western Financial Corporation
9200 Oakdale Avenue
Chatsworth, California 91311-6519
Fax: (818) 775-3471
Incorporated: 1955 as Great Western Corporation
Total Assets: $38.4 billion
Stock Exchanges: New York London Pacific
SICS: 6712 Bank Holding Companies; 6036 Savings Institutions Except Federal; 6162 Mortgage Bankers &Correspondents
True to its name, Great Western Financial Corporation is one of the largest financial services companies in the western United States. It is the parent company of the nation’s second-largest savings and loan institution, Great Western Savings Bank. Great Western engages primarily in retail banking and the origination of small residential mortgages, but it also runs operations in consumer finance, insurance underwriting, commercial leasing (a business de-emphasized since 1987), and real estate brokerage. The company has also engaged in a great deal of high-profile advertising in California media markets; it has employed actors John Wayne and Dennis Weaver in successful television and radio commercials, and in 1988 it bought the right to rename the Los Angeles Lakers’ home arena, the Forum, the Great Western Forum.
Great Western traces its history back to a savings and loan that began operation in California in 1919. In 1955 a holding company, Great Western Corporation, was formed in Los Angeles to oversee its assets and pave the way for a dramatic burst of acquisition activity. The next year, Great Western changed its name to the Great Western Financial Corporation. It expanded northward when it acquired Bakersfield Savings and Loan (later renamed Great Western Savings of Central California) and southward into Orange County when it acquired Santa Ana Savings and Loan. At the end of its second year in existence, Great Western posted a profit of $4.4 million and had $206 million in outstanding loans.
However, its growth spurt did not stop there. In 1957 Great Western acquired Sacramento-based West Coast Savings and Loan. Over the next two years, it continued to expand its presence in California’s Central Valley, acquiring San Jose-based Guaranty Savings and Loan in 1958 and San Luis Obispo-based Central Savings and Loan in 1959. Also in 1959, it acquired First Savings and Loan of Oakland. Thus, within five years, Great Western had gained at least a marginal presence in almost every significant metropolitan area in California.
Soon after, however, the company began to struggle as it digested its new acquisitions. In 1961 Great Western stopped paying its stock dividend. Delinquent loans and foreclosures rose dramatically, reaching $23.2 million in 1964. By 1965, however, the foreclosure rate had dropped just as sharply. Great Western also cut costs that year by merging its three northern California subsidiaries into a single association, First Savings and Loan. In 1965 the company also merged Santa Ana Savings and Loan with Great Western Savings and Loan.
By the late 1960s Great Western had recovered well enough to embark on another dramatic course of expansion. In 1968 it acquired Santa Rosa Savings and Loan in a stock swap. The next year it bought out Los Angeles-based Safety Savings and Loan. In 1970 the company paused to consolidate its three major subsidiaries, merging Great Western Savings and Loan, Central Savings and Loan, and First Savings and Loan.
The pause did not last very long, however, nor did it indicate that Great Western had in any way sated its appetite for growth. Less than a month later, the company acquired Belmont Savings and Loan in a stock swap. In June 1970 it acquired Santa Barbara-based Citizens’ Savings and Loan in a stock swap and North Hollywood-based Victory Savings and Loan for $6 millioitin cash. At the end of the year, Great Western merged with LFC Financial, parent company of Equitable Savings. In 1971 it acquired San Diego-based Sentinel Savings and Loan. Between 1972 and 1974, Great Western merged all of its savings and loan operations into a single subsidiary, Great Western Savings and Loan. In 1973 it liquidated its escrow operations.
Also in the early 1970s, Great Western, along with every other institution engaged in mortgage banking, found its ability to turn a profit challenged by radical changes in the economy. Rising inflation, worsened by the oil price shock, sent interest rates on a steep climb that would last into the next decade, catching mortgage lenders with outstanding loans booked at fixed interest rates that were suddenly below their current cost of funds. Mortgage lenders were faced with the conundrum of how to book 30-year loans in an environment in which interest rates were not only unstable but, it seemed, always on the rise. Great Western responded by pioneering the concept of the variable-rate mortgage, which gave lenders the flexibility to cope with wide variances in interest rates over the long term. By the end of the decade, 60 percent of the company’s mortgages were variable rate. Great Western was also quick to jump on the bandwagon when federal regulators approved adjustable-rate mortgages in 1981; by the early 1980s all of the company’ s new mortgages featured adjustable rates.
In 1979 James Montgomery, a former Price Waterhouse accountant, became CEO. Under Montgomery, Great Western remained decidedly untrendy in a very important way during the 1980s. While other savings and loans expanded aggressively by gobbling up weaker competitors and coped with deregulation of the industry by making high-risk loans and investing in junk bonds, Great Western remained conservative and stuck mainly to booking small residential mortgages. To be sure, the company expanded and diversified some: in 1982 it merged with Northern California Savings, and the next year it acquired the brokerage and real estate services firm Walker & Lee. Nonetheless, Great Western seemed like a stick-in-the-mud compared to the adventurousness of many of its cometitors.
By the end of the decade, however, Great Western’s decision to stick to what it had always known best had made Montgomery look very astute. While many savings and loans came to grief when their houses of financial cards collapsed, Great Western still stood on a solid foundation. In 1987 the company’s equity base was valued at $2 billion, an exceptionally strong 6.9 percent of its assets. That year, it sold off its life insurance subsidiary, John Alden Life Insurance, and terminated its fledgling commercial real estate business. However, it also acquired a profitable consumer finance company, City Finance, and prepared for major expansion throughout the western United States and into Florida. In 1988 Great Western acquired Phoenix-based First Commercial Savings and Loan and a Bellevue, Washington-based near-namesake, Great Western Saving Bank.
Great Western also scored some public relations points in the latter half of the decade. In 1988 it applied to the FDIC to recharter itself as a savings bank, and promptly changed the name of its primary subsidiary from Great Western Savings and Loan to Great Western Savings Bank. The change was largely a semantic one; James Montgomery publicly acknowledged that Great Western was, essentially, a bank that specialized intensely in mortgage lending. However, the change disassociated the company from the growing stigma attached by the general public to the savings and loan industry, which by then had become the beneficiary of a massive federal bailout and the center of some notorious scandals involving institutions that allegedly squandered depositors’ funds.
In 1989 the company paid nearly $4 million for the right to place its name on the Forum, the home arena of the NBA’s Los Angeles Lakers and the NHL’s Los Angeles Kings. As a result of the transaction, the Forum’s maroon exterior was repainted blue to match Great Western’s logo. A less visible result of Great Western’s sponsorship was a friendship between James Montgomery and Forum and Lakers owner Jerry Buss, who gave Montgomery one of his NBA championship rings.
As the 1980s gave way to the 1990s, Montgomery had earned the right to be a little smug about his success. As a guest speaker at a conference sponsored by Michael Milken in the late 1980s, Montgomery took a wry dig at the assembled junk-bond adherents when he noted that he had “built a company, if you’ll pardon the expression, with an investment grade.” He later said of the audience, who made their livings by hawking non-investment-grade companies to investors, “I’m not sure they all appreciated it.” Under Montgomery, Great Western had shunned the opportunity to buy failed savings and loans as a cheap and dirty way to expand. Instead, when it did acquire competitors, Great Western chose healthy ones and was careful to sell off all nonperforming assets as soon as it could.
As a result, Great Western found itself with a strong balance sheet that allowed it to take advantage when the Resolution Trust Corporation offered two high-profile opportunities for sale. In 1990 it acquired Miami-based CenTrust Federal Savings for $86 million, even after its initial bid of $100 million was refused as too low. The deal gave Great Western 46 branches in its most important new target market. The next year, it acquired Charles Keating’s Lincoln Savings, which came to the RTC by way of the most spectacular and scandal-ridden savings and loan failure to come out of the industry’s period of crisis, for a mere $12.1 million. Between 1990 and 1992, the company also acquired a handful of other properties: New Jersey-based Carteret Savings Bank in 1990, Florida-based City Savings in 1990, Pioneer Federal Savings in 1991, The First in 1991, and Miami-based Amerifirst Federal Savings in 1992.
Industry observers suddenly realized that Great Western had begun the process of building a national financial services empire centered on mortgage banking. At the same time, a major warning sign had arisen. The slowdown in the California economy, precipitated by major cutbacks in the defense industry, hit homeowners in that state with terrible force. Nonperforming loans rose 30 percent just in the first quarter of 1992, and profits fell 37 percent in the same period. Sluggish demand for consumer loans also magnified the cost of keeping over 1,000 branches and consumer credit offices open.
The company’s problems quickly turned some industry analysts against James Montgomery’s leadership. They noted that Montgomery, an avid collector of Western art and artifacts, had begun building a log cabin-style third house in Utah, and asserted that he was not paying enough attention to business matters. Problem loans, expressed as a percentage of total assets, rose steadily in the early 1990s, to nearly 5.5 percent in 1993. Much of the problem stemmed from the precipitous drop in Southern California home prices. In order to dominate the low end of the market, Great Western sold heavily mortgages requiring only a 10 percent down payment. The drawback of such loans was that a mere 4 percent drop in the house’s value would wipe out the borrower’s initial equity, and home prices fell as much as 35 percent in Southern California during this period. As a result, Great Western received defaults at a rate of $100 million per month during 1993.
Nonetheless, the company found the wherewithal to strengthen its position in the San Diego market in December 1993 when it won the bidding for nearly all of the assets of HomeFed Bank and purchased them from the RTC. Great Western had long desired HomeFed’s branches and deposits as a way of bolstering its presence in a key California market.
Undeniably, Great Western suffered a setback in the early 1990s on account of the sharp and sudden slump in California real estate prices. As of 1994, its future depended in large part on how effectively and quickly the state’s no-longer-golden economy could recover. The company’s moves toward geographical diversification, made in anticipation of the day when all restrictions against interstate banking would be lifted, should help reduce its dependence on a single regional market. It may also be said that for a savings and loan company to be left standing at all, much less to be standing large and relatively strong after the debacles of the 1980s, is an achievement to be saluted.
Great Western Savings; Consumer Finance Group; California Reconveyance Company; Great Western Financial Insurance Company; Great Western Investment Management Corporation; Great Western Mortgage Corporation.
Carson, Teresa, “How Playing It Safe Worked for Great Western,” Business Week, September 7, 1987.
Grover, Ronald, “Great Western Is Keeping Its Branding Iron Red-Hot,” Business Week, May 11, 1992.
King, Ralph T., “Great Western Financial Seeks to Chart a Fresh Course,” Wall Street Journal, May 17, 1993.
Lawrence, John F., “How to Succeed in a Lousy Business,” Fortune, July 3, 1989.