Ahmanson Taking a Different Road Under New CEO, and It's Bumpy

When Richard Diehl's hand-picked successor took the helm of H.F. Ahmanson & Co. last year, few could have predicted the massive changes in store at the country's largest thrift.

During the 26 years Mr. Diehl ran Ahmanson, the company's Home Savings of America thrift subsidiary had grown from a $2.6 billion-asset southern California lender into a $50 billion-asset national powerhouse through single-minded pursuit of plain-vanilla mortgage lending.

Yet no sooner had Mr. Diehl walked out the door, than the new chief executive, Charles Rinehart, threw that strategy out the window. Home Savings, Mr. Rinehart declared, would follow the latest fad in the thrift business and become more like a retail commercial bank.

Though Mr. Rinehart insisted in a recent interview that changing times require a new approach - "We're not dealing in the same market that (Mr. Diehl) dealt with," - the thrift's new strategy is drawing criticism from former top-level employees and analysts.

"I think diversification is a good idea, but a complete change of infrastructure by a major corporation is risky," warned one former executive, on the condition that he not be named.

Indeed, this kind of debate is being heard in corporate boardrooms throughout the thrift industry as many institutions are questioning their traditional allegiance to the highly-competitive home mortgage business.

It is surprising to many that Mr. Rinehart, a 49-year-old former actuary who left a top job at a midsize consumer finance company to become Mr. Diehl's protege, would stray from his mentor's approach.

But Mr. Rinehart argued that most of the mortgage loans Home Savings makes are only marginally profitable - the result of tougher competition on both the deposit and asset side of the business, as well as increased capital requirements.

The solution, he said, is to fundamentally reshape the business. Irwindale, Calif.-based Home Savings must get more high-yielding assets on its books, especially small-business loans and nonmortgage consumer loans.

It must also cut funding costs by selling more checking accounts, and ridding its portfolio of mortgages that don't earn at least a 15% return on equity but can be sold into the secondary market at a profit. This means letting the portfolio shrink, if need be.

In an extreme case, Mr. Rinehart said, the portfolio reduction could be as much as 40%, although the most likely scenario is shrinkage of a few billion dollars by the year 2000. This assumes that Ahmanson is successful in growing a new consumer finance division into a $5 billion-asset operation, and also adding another $2 billion to $4 billion from a new drive into small-business lending.

Mr. Rinehart said this strategy was never discussed with Mr. Diehl. Letting the mortgage portfolio shrink would have been anathema to Mr. Diehl's whole approach to the business, Mr. Rinehart said.

But the topic has come up between the two since Mr. Diehl's retirement, at informal lunches at such venues as a pier-side restaurant in San Clemente. Mr. Rinehart insisted that Mr. Diehl is a supporter of the changes - albeit a reluctant one. "Intellectually he agrees. Emotionally, sometimes he has a hard time with it," Mr. Rinehart said.

But getting employees on board has been tough. Mr. Rinehart has felt compelled to replace most of Mr. Diehl's senior executives with his own hires. The implementation of a mandatory retirement age last year is letting Mr. Rinehart replace much of the board of directors.

Los Angeles-based executive recruiter Robert Rollo, who introduced Mr. Rinehart to Ahmanson, and also placed many of the company's other top executives, insisted that the latest executive changes have brought in higher caliber executives better suited to a more sophisticated business. "From a senior management standpoint, it's just much more of a crisp, and broader-based group," he said.

But some of the executives who have left said they fear Mr. Rinehart may be risking undue disruption to the core mortgage business. The concerns peaked earlier this year when former president Frederic J. Forster abruptly resigned, citing unspecified "tactical" disagreements with Mr. Rinehart.

For now, Home Savings' core mortgage business appears to be suffering. Loan originations totaled only $6.5 billion in 1995, well below the 1992 peak of $12.2 billion.

Meanwhile, Home Savings' share of loan originations nationwide fell from 1.1% in 1993 to 0.8% in the first quarter of this year, according to Sanford C. Bernstein & Co., a New York brokerage firm.

Mr. Rinehart said that most of the decline in originations is due to stricter underwriting standards, instituted to reduce credit losses, and to make it easier to sell mortgages into the secondary market. But Home Savings is also going through a painful reengineering process, designed to cut loan origination costs by 40% with computerized mortgage processing.

The effort, due for completion by the middle of next year, also entails layoffs of 400 of the 2,000 employees in the mortgage division.

Mr. Rinehart said the cutback is slicing into mortgage sales. But there have been other problems. For instance, Home Savings gave out confusing signals when it shut down a wholesale mortgage lending operation in January, two months after starting it.

The company also had some temporary kinks in new computer systems that made it harder to collect some delinquent loans and contributed to a sharp increase in credit losses in the first quarter, said chief financial officer Kevin Twomey.

Ahmanson has also been criticized by community activists for halting lending to subsidized multifamily housing developments.

"The piece that has suffered the most during the transition, interestingly enough, has been the lending side of the business," Mr. Rinehart acknowledged. But Mr. Rinehart said he sees this downturn as a temporary "valley of despair," that will disappear as the business improves. He said he fully expects mortgage originations to grow to at least $20 billion by the year 2000.

There have also been some notable successes in reengineering the branch system. Since 1993, Home Savings has sold its Illinois, New York, Ohio, and Missouri branch systems for a healthy premium, averaging 7.5%. It has used the proceeds to bulk up in California, winning a hotly contested bid earlier this year for the 61 branches Wells Fargo & Co. has to divest from its merger with First Interstate Bancorp.

Mr. Rinehart followed that coup with the hiring of Bruce Willison, the highly regarded head of First Interstate's California bank subsidiary, to replace Mr. Forster as president.

But Sanford C. Bernstein analyst Jonathan Gray said it is not clear that these changes will fatten Home Savings' profits since the expense to process checking accounts may offset reduced funding costs. He also warned that Ahmanson's retrenchment in the mortgage business could cause it to miss out on a boom in adjustable rate lending if interest rates rise.

Mr. Gray said that he believes the single best thing Ahmanson could do for its shareholders is a merger of equals with archrival Great Western Financial Corp. Based in nearby Chatsworth, Great Western operates the country's second-largest thrift with assets of $42 billion.

Mr. Gray said Great Western would be an excellent fit for Ahmanson, since its strong consumer finance and wholesale mortgage lending units would complement Ahmanson's operations, and there could be substantial cost cutting.

But sources close to both thrift companies, said they see little chance of a merger any time soon. For its part, Great Western, which has a several-year head start on Ahmanson in developing a banklike service mix, sees little to recommend combining with an institution that would make it more like a thrift, according to a well-placed source.

Mr. Rinehart added that he sees potential problems, such as which of the two thrifts' managements should run the combined company.

Mr. Rinehart also said he sees very little chance that Ahmanson will be bought anytime soon by a big out-of-state bank, as many investors hope. Those banks don't want to use a thrift as an entry vehicle into California, even one that ranks as the state's third-largest depository institution with 8% of the market.

Mr. Rinehart added that Ahmanson has little appetite for buying smaller California thrifts, since their stock prices are now high because of merger speculation.

Buying a thrift would also divert Ahmanson from its goal of becoming more like a bank. All of which leaves many analysts saying that Mr. Rinehart's attempt to make Ahmanson more banklike seems like a sound idea. Even if the move doesn't boost profits, at a minimum it could someday attract an out-of-state acquirer like NationsBank Corp.

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