When Simone Lagomarsino took the helm of Hawthorne Savings Bank in December 1999, one of her first acts was to end the thrifts practice of lending to cash-strapped millionaires.
Not that this wasnt a profitable niche for Hawthorne, an El Segundo, Calif., institution. The $1.75 billion-asset thrift often wound up owning the mansions borrowers pledged as collateral valuable assets in Southern Californias sizzling real estate market.
But with these loans comprising 54% of Hawthornes $1.35 billion loan portfolio, Ms. Lagomarsino and other top executives were convinced they would be in big trouble if the real estate market tanked. By the beginning of last year Hawthorne stopped originating such loans and has since focused on more traditional real estate loans to borrowers with enough cash resources to repay.
The entire time we had been making those loans, real estate values were increasing, Ms. Lagomarsino said. But in the event of a downturn, we knew wed start to have problems with those collateral-dependent loans, and so we decided to reposition our balance sheet.
The strategic shift has paid off. Hawthornes ratio of nonperforming loans fell considerably last year and led to a 40% increase in earnings from the year earlier, to $14.3 million.
Moreover, investors appear much happier with the thrifts safer course. The share price of its parent, Hawthorne Financial Corp. of El Segundo, has more than doubled since bottoming out at $7.375 last April. The stock was trading at $16.25 at midday Friday.
Investors are more confident in the consistency of our earnings now that we have lowered the risk of a large hiccup in earnings because of one large bad loan, Ms. Lagomarsino said.
She had been the thrifts chief financial officer before succeeding Scott A. Braly as the companys president and chief executive officer after a dispute over continuing to make the high-risk loans.
Directors agreed with Ms. Lagomarsino that such an asset concentration could spell disaster in a downturn a fate the thrift had suffered on its construction loans to condominium developers during the last Southern California real estate bust in the early 1990s. In 1993 Hawthorne lost nearly $30 million when many of those loans defaulted.
Trying to learn from its mistakes, the thrift is now focusing on less-risky residential construction and mortgage loans, as well as commercial real estate loans to developers that have lease contracts with tenants. It is also capping participation in any one loan at $5 million.
Mike McMahon, associate director at Sandler ONeill & Partners in San Francisco, said Wall Street has been especially pleased that Hawthorne has reduced its nonperforming asset ratio from more than 3% in 1999 to 1.6% last year.
They still have to get that ratio down by another 50 basis points to get in line with their peer group, but theyre making very solid progress in doing that, Mr. McMahon said.
Investors were also relieved that Hawthorne strengthened the liability side of its balance sheet, he said.
Under the old regime, Hawthorne was an asset generator that was using deposits like jumbo CDs to fund loans anywhere they could find them, including Manhattan, Mr. McMahon said. Under the new regime, they are looking for quality assets within their footprint in west L.A. and funding those loans with an increasing percentage of core deposits checking and savings accounts, money market accounts and not jumbo CDs.
Core deposits are valued more than jumbo CDs because they stay with the bank longer, as opposed to buyers of jumbo CDs, who go from thrift to thrift looking for the best rates.
Hawthorne is also beefing up its cross-selling skills to strengthen its deposit base at its eight branches, most of which are in the affluent coastal suburbs of Los Angeles.
Were starting to offer more services in our branches to increase our fee income, including overdraft protection, debit cards, automobile loans through third-parties, and other consumer products, Ms. Lagomarsino said. As a result, fees on deposits last year grew 146% from the year earlier, to $1.22 million.
Next on the horizon is Internet banking, as well as a partnership with Salomon Smith Barney to offer investment services in each branch, she said.
Mr. McMahon said investors should feel confident that Ms. Lagomarsino and the rest of the management team will keep Hawthorne on the right track.
Hawthornes stock has been trading around $16 consistently for the last couple of months because Simone and her team have done a very good job at following through on what they promised investors at the end of 1999, Mr. McMahon said. I think the companys valuation will continue to increase because of them.
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