Larry Gillie wants his old-fashioned thrift to make money the new-fashioned way: through commercial banking.

The former commercial banker is eager to steer First Federal Bank for Savings, whose performance has been lackluster for several years, back toward his own roots. Commercial lending points the way to the suburban Chicago thrift's future, he says.

First Federal is typical of hundreds of community thrifts that survived the industry's last crisis by honing their traditional mortgage skills but may now be swept away by radical changes in housing finance and in the financial structure itself.

"Mortgage lending is a very difficult business and becoming more so all the time," said Thomas O'Donnell, senior thrift analyst at Smith Barney. "Very few thrifts are going to prosper in the future by remaining traditional savings and loans."

For 62 years, $630 million-asset First Federal of Des Plaines has stressed mortgages. Not until two years ago did the thrift expand beyond its original office, and it has refused to write many second mortgages because they implied the borrower was in trouble.

Mr. Gillie now sees such traditional portfolio lending as outmoded, and said he believes institutions like his are being squeezed out of an increasingly competitive mortgage business by finance companies and the secondary market.

"We were basically the traditional thrift that sat in one office and did not expand," Mr. Gillie said. "We were very conservative in nature, and still are, but we changed dramatically in the last few years."

That may be an understatement. The thrift, which had 80% of its portfolio in 30-year fixed-rate mortgages just two years ago, is in the midst of a massive retooling.

In the past two years, the institution has significantly expanded in credit cards and direct auto lending, introduced checking accounts, and soon will add business lending. The thrift is currently developing its policies for commercial loans but hasn't yet hired a business lending specialist.

In its first major step, the thrift last December securitized $116 million in 15-year and 30-year mortgages for its first sale on the secondary market.

By 1997, First Federal officials are hoping to reduce long-term fixed- rate assets to no more than 50% of their portfolio. And most of the loans that remain will have terms of less than five years. That will provide more short-term liquidity for it to reinvest in higher-yielding commercial products.

"This is probably the biggest change the bank has gone through and probably ever will go through," Mr. Gillie said.

He and First Federal are not alone. Tradition-bound thrifts nationwide are seeking new ways to increase profits. Recognizing that mortgages alone won't do it anymore, they are gradually shifting their asset mix toward consumer and commercial lending - once taboo for risk-averse thrifts.

Industry giants such as Irwindale, Calif.-based H.F. Ahmanson & Co. are leading the charge, viewing commercial banks in their markets as primary competition.

"It's a trend that's really picking up speed and I think some of the more innovative thrifts will be marching down that road," Mr. O'Donnell said.

The strategy has proven successful for many. Profits have risen, as has acclaim from stock analysts and investors. And with the future of the thrift industry in legislative limbo over deposit insurance, thrifts like First Federal are even considering going the distance - and formally converting to banks.

Mr. Gillie's efforts to broaden First Federal's offerings have brought him full circle. After 23 years in commercial banking, he was brought on board in 1987 as executive vice president, eventually succeeding Donald J. Cameron as president.

After several years of touting the benefits of a commercial strategy, Mr. Gillie's chance came in March 1994, when Mr. Cameron stepped down as president and chief executive. And he didn't waste any time.

The day after Mr. Gillie took over as president and CEO, First Federal initiated free checking accounts for individuals. The thrift now has 10,000 of the accounts and began promoting commercial accounts last month. The thrift has also actively been cross-selling home equity loans in packages with mortgages.

Within a year of Mr. Gillie's promotion, the thrift, which had only $390 million of assets and one office in early 1994, had bought one branch and opened another as it sought to expand its customer base.

And since last November First Federal has offered telephone banking and a World Wide Web site, initiated credit scoring, and made plans to introduce a debit card in April.

"We want all our customers to view First Federal as a full-service bank, not just a savings bank," said Mr. Gillie, who was president of Northbrook Bank for 14 years. He began his career in 1965 as a teller at First National Bank of Chicago Heights.

Ultimately, the most dramatic changes were driven by interest rate volatility and the realization by Mr. Gillie and his colleagues that the mortgage market had lost its profit allure.

In particular, he said, the rise of the zero-point mortgage during the 1994-95 refinancing boom meant that "people would refinance at the drop of a quarter point if it didn't cost them."

Those changes, however, have also required a complete makeover of the employee mentality, Mr. Gillie said. Experienced mortgage lenders are not accustomed to cross-selling other products on every first mortgage. Many aren't even inclined to try out of fear of taking risks without clear guidelines.

"Our biggest struggle is to find the people and train them well," said Mr. Gillie, who coaches Little League baseball and a youth basketball team. "It's still a people game and some people can't do it. For them to be able to make the decision themselves is scary."

In response, First Federal has launched a sales training program, encouraging employees to become freethinkers who take judicious risks in serving and helping customers.

"As Wayne Gretsky said, 100% of the shots you don't take are missed," said the 55-year-old banker, who also likes to quote Miami Dolphins football coach Jimmy Johnson. "If you make a mistake, just go on. As long as you don't give away the bank, you'll still have your job. And I'm not sure all of them believe that because often that's not the case."

First Federal has even fired several longtime employees because they were unwilling to change.

"They're from the old school and that's not the way you're going to do business in the '90s and the next century," Mr. Gillie said.

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