NEW ORLEANS -- James F. Montgomery, who runs the nation's second-largest thrift, has been an industry heavy hitter for years. He is the chairman and chief executive of Chatsworth, Calif.-based Great Western Financial Corp., the parent of Great Western Bank, which has $36 billion of assets.

He spoke earlier this month in New Orleans, where he attended the annual Savings and Community Bankers of America convention.

Mr. Montgomery described how he has shifted Great Western's focus away from traditional "thrift " activities, and he expects it to prosper as soon as the California economy improves.

Q.: What trends have you seen in California, and how do they affect thrift institutions?

MONTGOMERY: I think the California economy particularly Southern California, remains in a state of malaise. We see things kind of bouncing along the bottom right now. We see some modest improvements in our delinquency trends. but nothing that will tell us that there has been any kind of a turnaround there.

Q.: What has that done for Great Western?

MONTGOMERY: We had a peaking of our nonperforming assets a few months ago, and we've taken a series of steps to get them down. As we just announced in connection with our third-quarter report, our nonperformers, which peaked at just over 5%, now look like they are right around 3% with the actions we've taken with bulk sales.

So we've got it going in the right direction. We certainly are not ready to claim victory because we've got a ways to go yet, but it feels a lot better than it did a few months ago."

Q.: What's your strategy for beating the rest of the recession?

MONTGOMERY: I think that our strategy is to reduce our level of nonperformers as quickly and as effectively as we can, be conservative in our new lending, and just kind of ride it out. Our loan volume is not all that bad, considering the economic conditions. And of course, we are lending an awful lot outside California.

We have been expanding our out-of-state lending outside California for the last few years. But we certainly have not turned our back on California. That is always going to be our No. 1 marketplace.

Q.: What do you see happening with the competition between banks and thrifts in California, and between thrifts and mortgage bankers?

MONTGOMERY: There has always been competition between banks and thrifts in California. There are less of each now, but we are used to competing with Bank of America and Wells Fargo.

Whenever interest rates are low, we tend to see a proliferation of mortgage bankers. The difference this time around is that there are a lot of big players in mortgage banking as well.

Q.: Do you think they are going to leave when interest rates change?

MONTGOMERY: I think a lot of the smaller companies will, as they have in the past. These big companies are certainly going to be around when rates go up. We are able to be better relative competitors when rates rise because we are adjustable-rate lenders and we are portfolio lenders.

We just have a greater percentage of our volume in fixed-rate loans, and we sell all the fixed-rate loans that we get. But we are still making a good volume of adjustables and keeping those.

Q.: Do you think any changes are necessary to prepare for narrower interest-rate spreads?

MONTGOMERY: Our numbers look very good to us, in terms of spreads and in terms of our nonspread income. We have done a good job of developing our fee-based activities. All the numbers look good except the level of nonperformers.

We've done more than other thrifts in terms of developing ... more banklike, fee-based activities. Is that typical of thrifts? Not necessarily, but that is typical of where I think the world is going.

You are going to have fewer and more successful companies that are offering a wide variety of financial services. We happen to want to offer them to people and families as opposed to corporations and others.

We think we are a mortgage oriented consumer bank, and we are pretty far down that road in terms of our own restructuring. There has been a big interruption, which has been this California single-family downturn.

But we can see that as that problem is [put] behind us, the rest of the balance sheet seems to be structured pretty well.

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