Golden West Plugs Along Profitably Amid Deal Mania

Investors love deal-happy big banks these days.

But last week, Golden West Financial, the Oakland, Calif., thrift, showed that stellar earnings can still propel a stock.

Shares of the $39.7 billion-asset thrift, which specializes in making adjustable-rate mortgages, gained nearly 6% in value after it announced last Wednesday that first-quarter earnings had surpassed analysts' estimates by almost 15%.

"It's the same old, very positive Golden West story," said Thomas O'Donnell of Salomon Smith Barney. By keeping costs low and originating mortgages aggressively, Golden West increased net interest income, which makes up the bulk of its earnings.

Low rates have encouraged people to refinance into cheap fixed-rate mortgages. But Golden West held its own in the first quarter. Marketing aggressively, the thrift originated $1.5 billion of mortgages, about as much as the year earlier. About 90% of the mortgages were adjustables, compared with a national average of about 12%, according to the Federal Housing Finance Board.

Net interest income on Golden West's adjustable loans and mortgage- backed securities increased 11%, to $243.7 million.

To be sure, Golden West's earnings surprise wasn't all of its own making. Thanks to California's economic resurgence, the thrift was able to slash its provision for bad loans from $20.7 million in the first quarter of 1997 to less than $3 million this year.

Still, analysts credit Herbert and Marion Sandler, the husband-and-wife team who run the thrift, for their adroit execution of a simple strategy: Keep operating costs low, and focus on making mortgages.

"By staying the same they become unique in a world where their peers are all changing their stripes," said Bruce Harting, who follows the company for Lehman Brothers Inc.

Most other large thrifts hedged their bets in the past decade, diversifying into home equity, auto, and other consumer lending. Many of those thrifts, like California's Great Western Financial and H.F. Ahmanson & Co., lately became grist in the merger mill after concluding they had to be bigger to make money at their strategy.

But the Sandlers, who own about 19% of Golden West, are turning a healthy profit while bucking the trend. Golden West's return on equity in the first quarter was 15.8%; return on assets, 1.1%

It will become the largest independent thrift in California this year, when Seattle-based Washington Mutual Inc. completes its purchase of Ahmanson. Though they are nearing an age when many CEOs retire - Herbert is 66; Marion, 67 - the Sandlers show no sign of selling any time soon.

Buyers are not clamoring either. Golden West is so efficient that an acquirer would be hard-pressed to increase profits by cutting fat. Nor do most banks want so large a portfolio of mortgages as Golden West possesses.

Analyst R. Jay Tejera of Dain Rauscher, Minneapolis, compared Golden West to another big, mortgage-focused thrift, Washington Federal in Seattle.

"Their strategy is to be the last of the dinosaurs," Mr. Tejera said of the two institutions. "What better combination than the two?" he asked, "except both their managements are nearing retirement." Washington Federal chairman Guy C. Pinkerton is 63.

"They've lived through many fads and many merger manias," Mr. Harting said of the Sandlers. They could change course, but unlike many thrift executives, they are under no pressure to do so, he said.

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