OAKLAND - In the late 1990s, when most financial institutions were racing to build the biggest and best online banks and brokerages, Golden West Financial Corp.'s two leaders were debating ATMs. Not whether to upgrade them with video or touch screens, but whether to have them at all.
"There was no good business reason," Marion Sandler, the chief executive officer, said in a joint interview last month with her husband and co-CEO, Herbert Sandler.
At the time only 15% of its World Savings Bank's deposits were in liquid accounts, though a new high-yielding checking account promised to increase that portion.
World Savings eventually bit the bullet, installing its first automated teller machines in 1999. But the executives first went through a detailed analysis - not just of the costs from installing and maintaining the network, but of their impact on branch traffic and even the kind of customer the thrift attracted.
Even now, Ms. Sandler said, "I'm not so sure it was a good decision."
This attention to what might seem to be a slam-dunk business decision has transformed Golden West from a two-office, $34 million-asset thrift to a $70 billion-asset public company with one of the best earnings track records in the country.
And in many ways it has remained a thrift in the 1960s sense of the word. Its 6,839 employees generate most of its revenues by making mortgages and selling savings products to retail customers. It does not lend to corporations. It even offers passbook accounts.
Golden West got this way under the leadership of the Sandlers, who have molded it over the last 40 years to fit their vision of a successful, low-cost mortgage producer and retain a 11% stake in it. But their influence and tenure lead people to puzzle about what will happen when they do retire.
"What's the endgame? Will they sell it? For investors, those are the big questions," said Mark Agah, an analyst who covers the thrift company for the New York research firm Portales Partners LLC.
In the interview, the Sandlers made it clear they have no plans to sell the company, and even though both passed the typical retirement age of 65 in the mid-1990s, neither has immediate plans to retire.
The company has a succession plan, and the two men slated to step up are Russell Kettell, the chief financial officer and president, a soft-spoken financial whiz who is a familiar face to analysts and investors; and Jim Judd, the president and chief operating officer of World Savings. Mr. Judd divides his time between Golden West's downtown Oakland headquarters and its campus in San Antonio, which now has more employees.
THE BAILEYS
Inside the headquarters, the executives' offices occupy a floor that has been decorated in opaque glass, slanting half-walls, and black and white artwork. The look, mirrored on six other floors, is modern. The balance sheet looks anything but.
One- to four-family mortgages made up 92% of the loan portfolio at yearend. Its efficiency ratio, an indicator of how much money it is spending per dollar of income generated, hovers around 30%. Both figures point to a traditional thrift model.
"Just call us Mr. and Mrs. George Bailey," quips Mr. Sandler from his office overlooking Lake Merritt.
"Traditional thrift" may be going too far. As it did with its offices, Golden West spends money on modernizing certain aspects of its business, like training and technology. In the 1990s it built a corporate campus in San Antonio, plowing money into an impressive new data center. And the introduction of its high-yield, high-balance checking and money market accounts have shifted its deposit mix away from the old-fashioned thrift model. Now, certificates of deposit make up only 35% of its deposits.
In terms of strategy, it has veered from the path taken by many of its peers.
As a result of the 1980s federal legislation that blurred the line between thrifts and commercial banks, many thrifts have shifted their focus from cost and speed - making and closing mortgages as quickly and cheaply as possible - to promoting sales.
Washington Mutual Inc. of Seattle and Greenpoint Financial Corp. of New York have thrift charters but have styled themselves more as consumer banks, pushing free checking and even small-business banking. For some companies, like Golden State Bancorp of San Francisco, a similar transformation helped seal a sale to a commercial bank.
Golden West sells many of the same products as its bank competitors, including its own mutual funds. But the Sandlers still refer to World as a "savings operation." And they reward their employees not for bringing in revenues - the hallmark of many banks that consider themselves "growth companies" - but for increasing productivity.
"At this company, that's jazzy and sexy," Mr. Sandler said.
IN THE BEGINNING
Before the Sandlers became thrift executives by buying Golden West in 1963, they worked on Wall Street. She was an equity analyst covering thrifts, and he was a securities lawyer. They met in the Hamptons, got married, and moved west. They figured early on that they could beat low margins by squeezing out credit and operating costs. That strategy helped them survive the savings and loan crisis and the California recession with enough capital to acquire other failing institutions, and they have stuck by it.
"We are very good at executing our business plan. We don't have an incentive to do anything else," said Ms. Sandler.
What's the secret? Keeping credit costs down by avoiding corporate loans and subprime mortgages, and by using their own underwriters rather than an automated system.
And they shave operating costs by putting new products through a battery of exams before they are introduced. "Our acid test is, what is the business reason for doing that?" says Ms. Sandler. "Sometimes it's productivity, sometimes it's enhanced service. But you'd be surprised at the number of things that are done for ego or to make a large company."
The months of analysis that preceded the introduction of the ATMs is just one example of this strategy in action. Acquisitions are another. Golden West has reviewed every significant thrift that has been put up for sale over the last 20 years, running the numbers on them all before submitting a bid for some. The last time it bought anything was in 1994, when it bought a $40 million-asset New Jersey savings bank.
All the acquisition opportunities Golden West passed up "didn't pass the test," Mr. Sandler said.
Largely sitting out the last two decades of consolidation has left Golden West with time to build branches, particularly in Florida, Texas, and California. And under Ms. Sandler's direction, it has turned branch construction into a science. With a goal of servicing homebuyers and older savers, it has come up with a formula of plaza corner locations, arresting designs, and open spaces.
A visit to the World Savings branch in San Francisco's Sunset district, at one corner of the Lakeshore Shopping Plaza, illustrates this point. The exterior resembles a series of large gray building blocks stacked on a tilted plane. The interior is large and sparsely furnished - except for couches where employees approach waiting customers, and a silver coffee urn.
Golden West even puts its office chairs through the wringer, asking secretaries to test them before they are purchased. "We're very big on testing," Ms. Sandler said.
The third big weapon in their arsenal is interest rate risk management.
In the early 1990s the Sandlers started to craft a niche by making variable-rate mortgages that they would hold in portfolio instead of making, then selling, more common fixed-rate loans. As they tweaked the products over the last few years, ARMs have helped insulate earnings against interest rate swings. Golden West links the rates for many of its adjustable loans to the rates on its savings products. This gives it more control over the spread between its funding costs and the rates on its loans.
Though mortgage rates fell last year, Golden West's margin rose by 24 basis points.
BEATING BUFFETT?
The results, by many standards, have been off the charts. Charged-off loans as a percentage of average loans averaged 0.00% for the last five years, compared to 0.19% for the industry, according to according to SNL Securities. General and administrative expenses have averaged 0.92% of total assets, compared to 2.4% for the industry.
"Because of their narrow focus, they can be more efficient," says David Fanger, an analyst at Moody's Investors Service Inc.
Golden West has even managed to increase assets despite historically low mortgage rates, which tend to lure away customers to fixed-rate loans. The Sandlers say they have done this because its ARM rates are still lower than those for fixed products and their sales force is focused on selling people on the benefits of adjustable loans.
All these factors have translated into steady earnings growth. Over the last five years its annual earnings per share has risen at a compounded rate of 25%. In fact, executives like to point out that its average annual compound EPS growth rate of 20% over the past 35 years beats that of any company they know - with the possible of exception of Warren Buffett's Berkshire Hathaway Inc., which does not disclose that figure.
For this achievement, investors have awarded Golden West's stock a premium - at least to other thrifts. Its price/earnings multiple of 12.9 beats Washington Mutual's 10 and Countrywide Financial Corp.'s 9.1.
But Golden West shares still trade at a lower multiple those of banks and companies in other sectors.
"It's a great company, with a tremendous track record - the concern is just that it's a thrift," says Steve Wharton, an analyst with investment manager Loomis, Sayles & Co. LP.
In 1998, when the yield curve flattened and the earnings environment for ARM lenders soured, investors dumped Golden West's stock out of worry that profits would drop. Instead, earnings rose 9% that year, in part because of stock buybacks.
Doing well for so long has allowed the Sandlers to brush off suggestions from outsiders. For instance, in response to a suggestion made by an audience member at an investment bank conference last year, Mr. Sandler said, "We never listen to Wall Street. Why should we take advice from a sector that can't manage itself?"
END OF THE LINE
Most discussions about Golden West's performance quickly come back to its management, and more specifically, the Sandlers.
Of course, there is the novelty of a husband-and-wife team running a Fortune 500 company - for four decades.
How do they do it? "An oversimplification is that Herb works on the asset side while I work on the liability side," said Ms. Sandler.
It's clear they work hand-in-hand, interrupting each other during the interview to clarify answers to questions and working from adjacent offices. In person, they come across as contrasts.
Mr. Sandler is tall, red-haired, and outgoing, striding across investor stages like they're revival tents. His wife is almost a foot shorter and keeps a lower profile to outsiders, though those who know her cite her analytical prowess. She's known to knit at board meetings; one acquaintance says that "may be a relief from boredom." When she speaks, her statements are to the point.
They share a passion for liberal and health causes; one of the biggest beneficiaries of their family foundation is Human Rights Watch.
It's no surprise that the couple and the company have become synonymous in many people's minds. The Sandlers view positions like public or investor relations as an unnecessary layer of bureaucracy, preferring to be the points of first contact for reporters and investors. They have eschewed other props of publicly traded companies, such as quarterly earnings conference calls. Yet some of their habits, like refusing to give EPS guidance, have recently come in vogue.
When asked the inevitable question about when they will retire, Mr. Sandler says their plan is to live to 110 "and remain functioning until 108." In seriousness, both say they have no plans to leave the company anytime soon. Herb is 71; Marion is 72.
Thanks to a combination of loyalty and encouragement from the Sandlers, the management team is solid: only three of its top 75 managers have left over the last 20 years. "And one of them came back," Mr. Sandler said.
With so many senior managers having been at the company for decades, some critics have said it can be insular. At the very least, the Sandlers have gained a reputation for skirting conventional wisdom on many subjects. "They're quirky but are great stewards of capital," Mr. Wharton said.
Its biggest outside investor is not worried about the succession question.
"We've very large shareholders, but there are a couple larger than we are - the Sandlers," said Christopher Davis, a portfolio manager at the value investment firm Davis Advisors, which owns close to 10% of Golden West. "We all have our interests aligned, not just in terms of what happens in the next year, but in the next 20 years."
Beyond the Sandlers' 11% stake, Marion's brother, Bernard Osher, who is also on the board, owns 4.3%. The Sandlers' two adult children are not involved in Golden West, though they play roles in the family foundation. And ultimately, the Sandler Foundation will inherit the couple's shares and play a role in managing the company after their death.
"Everything we have goes into a philanthropic foundation -everything," and the Sandler Foundation "won't be dumping the stock, if that's what you're asking," Mr. Sandler said. "Our children are very close to people at the company."
