2 Thrifts Break the Mold : Western Financial Soars on Strength of Auto Loans

Fast-growing Western Financial has been able to take advantage of financial deregulation by providing loans for both houses and cars--an unusual combination for a savings institution.

Barely eight years ago, savings and loans were not allowed to make auto loans, but deregulation opened a host of new opportunities.

While many S&Ls; mismanaged their new powers and wound up insolvent, Western Financial has impressed regulators with its ability to successfully mix auto lending with traditional home loan operations.

Only two other U.S. savings institutions--First Nationwide and Glendale Federal--handle more auto loans, and each is more than 10 times the size of Western Financial, said Stephen W. Prough, president of the S&L.;

“As long as California continues to grow and people have to depend on automobiles, we’ll do well,� predicted Robert W. Jenkins, chairman of Western Financial and vice chairman of its parent company, Westcorp, headquartered in Orange.

In most respects, Western Financial operates in a traditional manner. It offers only savings accounts and eschews such newfangled items as interest checking. Its real estate loans are almost entirely for single-family homes and small apartment buildings. Commercial loans are avoided.

Yet half its total loan portfolio consists of automobile financing, an area normally frowned on by S&L; regulators. Though given the power to compete against banks for such consumer loans, most S&Ls; still shy away from car loans because they are considered riskier than home loans.

“They’ve done a good job of managing the risks in auto lending,� said James F. Wilson, an industry analyst with Sutro & Co., a San Francisco brokerage.

Even regulators admire the S&L;’s ability to keep the number of delinquent car loans considerably below the national and state industry averages. At the end of December, only 1% of the S&L;’s auto loans were more than 30 days past due, while the rate for commercial banks nationwide was 2.2%.

“You don’t get that low delinquency rate by being soft-hearted,� said William J. Crawford, commissioner of the state Department of Savings and Loan. “You have to have firm collection procedures and good equity.�

Good collection procedures start with quality loans, Prough said.

The S&L;’s forte is the speed with which it processes auto loans. Nearly all car loan applications come through dealers to five S&L; auto dealer centers throughout the state.

Employees check applicants’ credit histories, verify their employment and wage information, review their financial statements and ability to repay loans and handle other underwriting chores.

The goal is to approve or reject auto loans within 48 hours after receiving applications. Typically, dealers send the same applications to a number of potential lenders, so quick response is as important as thorough research, Prough said.

Once the loans are made, Western Financial backs them up with a sophisticated computerized program that gives it “excellent control and immediate feedback on how we’re doing at any time of the month,� Prough said.

“There’s nothing fancy, nothing glamorous about auto lending,� Prough said. “The real key is that we’re good at what we do.�

The credit, he said, belongs to a group of three dozen employees who have worked together making auto loans for eight years. About 10 of them have worked together for up to 20 years.

“You have to be street smart to make auto loans, and we’ve got the guys who are street smart,� said Jenkins, who has been making car loans for 40 years.

Through its 21 branches statewide, Western Financial started expanding its auto financing business earlier this year by offering auto loans directly to consumers, he said. Previously, the S&L; made few such direct loans.

Matching Technique

Auto loans, with their slightly higher interest rates, represent only half of Western Financial’s business. Its traditional savings account and home lending operations also have been growing.

The S&L; does not offer interest checking because its studies have indicated that the profit margin is too slim, Prough said. By avoiding the overhead costs associated with additional tellers and check-clearing personnel, the S&L; can offer interest rates on savings accounts that rank “among the highest� in the industry, he said.

In addition, the S&L; has matched the duration of 95% of its loans and securities with the length of time it holds its deposits, Prough said. That matching technique locks in profit margins and makes the S&L; almost immune from interest rate swings.

Unlike many S&Ls; that originate home loans and then sell them to others, Western Financial plans to keep most of its home loans in its own portfolio. Prough said portfolio lending enables the S&L; to be more flexible in providing loans to those who might not otherwise qualify.

Taking a cue from its auto lending strategies, the S&L; has initiated a home loan application that can be filled out in two minutes and either approved or rejected within 72 hours, subject to appraisals. The short-form application reduces the amount of paper work associated with home loans to a minimum.

Western Financial was created in a 1983 merger between the 19-branch Western Thrift & Loan in Orange and the single-office Evergreen Savings & Loan in Redwood City. Thrifts are strong consumer lenders that often concentrate on auto financing, and Western Thrift was considered one of the better ones.

It proved to be a timely combination. Auto sales nationwide jumped an average of 10% a year from 1982 through 1986, and car prices have increased about 2% a year, industry analysts said.

The brisk auto economy helped Western Financial’s net income climb to a record $11.2 million in 1986. After a decline to $9.7 million last year, caused mainly by fewer sales of securities, the S&L; appears to be headed toward another record year in 1988. The S&L; reported net income of $3.4 million for the first quarter.

Earnings will be enhanced this year because the S&L;’s growth should slow, Jenkins said. Prough acknowledged that rapid growth has strained management’s ability to train new employees and contributed to lower profits last year.

With regulatory approval, Western Financial has pioneered the development of a secondary market for its car loans by selling bonds backed by the auto paper. The sales have helped to alter the S&L;’s loan portfolio by lowering the amount of car loans to 40% of assets and raising home loans to 60%, the level required by federal regulations.

The securities program also has raised $789 million in cash and helped to fuel dramatic growth that would stagger many other institutions.

Since its formation, Western Financial and parent company Westcorp have grown to $1.8 billion in assets at the end of December from $262.4 million four years earlier. Its average annual growth is 62%, more than double the 25% limit that regulators impose on most S&Ls.;

One reason regulators have permitted such fast growth is that Western Financial’s regulatory capital, a standard measure of financial health, had grown by the end of December to 15.8% of its liabilities--five times what regulators would require.

Another strong barometer of Western Financial’s health is its overall rate of loan delinquencies. At the end of December, less than 0.5% of Western Financial’s loans were more than 60 days past due. Nationwide, the rate for all S&Ls; was 2.6%.

“The exciting thing I see about our growth is that our delinquencies are actually going down--we’re not just outrunning them,� Prough said. “At the end of December, 1986, we had $10.1million in delinquencies. A year later it was down to $7.8 million. And at the end of March, it was down to $7 million.�

Like Downey Savings & Loan and other well-run S&Ls;, Western Financial has found that success doesn’t necessarily translate to higher stock prices. Its stock closed Friday at $6.125 a share, up 12.5 cents for the day.

Ernest S. Rady, chairman of Westcorp, controls 62.8% of the parent company’s stock, and Jenkins, the next largest shareholder, owns 1.6%. Institutional investors own another 15%, analyst James Wilson said. Since there’s no opportunity for an outside party to buy a large stake in Western Financial, many investors don’t bother with the stock, he said.

Prough said that criticism on Westcorp’s stock performance comes mainly from those who say there’s “not enough hype� for the stock market. But he said he and other officers meet with analysts twice a year.

“We feel that as long as you have consistent earnings, investors will find you,� Prough said.

WESTCORP/WESTERN FINANCIAL SAVINGS

(in millions)

1987 1986 1985 1984 Assets $1,781.1 $1,322.8 $761.7 $455.5 Total Loans Originated 1,072.7 721.4 464.0 386.8 Consumer Loans Originated 548.9 381.3 311.4 283.3 Net Income 9.7 11.2 7.8 5.4

1983 Assets $262.4 Total Loans Originated 235.6 Consumer Loans Originated 224.1 Net Income 3.4