When John Robinson took over as director of the Office of Thrift Supervision's western region in September 1993, the West Coast thrift industry was still in a perilous state. Investors had bailed out two of the biggest troubled savings and loans - Glendale Federal Bank and California Federal Bank - but 23 institutions, with $14 billion in assets, remained on the danger list.

Now the number of troubled thrifts in the region, made up of Arizona, Utah, Wyoming, Montana, and points west, is down to five, and the California economy is showing signs of life. But Mr. Robinson still has his worries, which he shared in an interview at his San Francisco office.

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What's up with the California thrifts?

ROBINSON: They're pretty much out of the woods, but they haven't yet reached the shining castle in the sky. They're still wandering around somewhere in the flatlands, trying to figure out what they're going to be, and how they're going to compete in this very tough business.

You've got a number of different institutions following a number of different strategies, trying to position themselves to be competitive for the future. Some of them want to be commercial banks, some of them want to be consumer community financial institutions, some of them want to stick to their knitting and be the most efficient, best home mortgage lenders there are. It seems to me that all those strategies have a potential for succeeding, but it depends on execution. Generally it depends on becoming a low-cost provider.

Are thrifts being squeezed by Fannie Mae and Freddie Mac on one side, and high deposit insurance premiums on the other?

ROBINSON: It's making it very difficult to make money. That's what is driving people crazy in the traditional thrift industry.

It's very difficult to hold mortgages that Fannie and Freddie can hold with half the capital. That's a situation you just can't compete in for very long. So you've got to find other assets to hold in portfolio, or you have to be content with an 8% return on equity, which most investors aren't content with.

On the flip side, you've got the competition on the liabilities from Fidelity and Charles Schwab, not to mention the banks.

As for the deposit insurance premium differential, I don't think economics will allow it to persist. There's a very strong incentive to avoid that tax. We've seen evidence of that starting to occur. Even if it didn't happen within the thrifts, it's going to happen from thrifts to banks.

That puts a real squeeze on, and even without that it's a tough business to operate in because you've got regulatory costs associated with it as well.

Regulatory costs that Charles Schwab and Fidelity Investments don't face?

ROBINSON: Right, and Countrywide too. In order to be successful in this business - if you're a large institution or an institution that's operating in a large market - you've either got to develop some businesses where you don't have to worry about subsidized competitors, the Fannies and Freddies, or you've got to become a very, very efficient operation and drive your costs down.

The institutions that operate in Montana, Wyoming, and Oregon probably have a little bit of shelter from these competitive forces. To the extent they can become community financial institutions, maybe they can operate more profitably. My guess is those guys can continue on with business as usual. They're making good money, they have strong capital positions, they don't have loan losses, they're doing just swimmingly well.

But the folks who have to operate in the highly competitive markets, regardless of whether they're big or small, have a tough row to hoe.

Do you see a lot of them moving out of the mortgage business?

ROBINSON: I see a lot of them not moving out of the mortgage business, but emphasizing growth in different directions. Not very many people find it profitable to hold in portfolio conforming mortgage loans. They may find it profitable to hold nonconforming mortgage loans in portfolio - jumbos or B- or C-type paper. They can get a bigger spread on those and they don't have to compete directly with Fannie and Freddie.

But there's also a lot of interest in going into the small-business lending arena. A lot of people are sniffing around in automobile lending, other types of consumer lending. It's not that there's no competition in those areas, but it's not as intense yet.

As a regulator, does any of this concern you?

ROBINSON: Sure, I always worry about folks moving into new businesses. The principal concern is that they not do it too fast, and that they have the kind of management expertise that they need to do it safely. Institutions have to change, they have to adapt to the market, they have to take the shot that's given to them. My charge to them is fine, take it, but do it carefully and in a measured way. Don't jump in with both feet.

Is the California economy on the upswing?

ROBINSON: I think the most evidence that one can glean from the numbers so far is that it's not headed down, or at least not headed down as fast as it was before.

Northern California seems to have bottomed out a couple years ago and started improving. Southern California, I'm still hearing reports of some minor declines in values in the housing markets.

Are there any credit quality worries at West Coast thrifts?

ROBINSON: I think there has been a decline in the credit quality in '94 and '95, particularly early '95, for mortgage lending in general. We're starting to see some of it showing up in minor ways in our delinquency ratios. That's a concern. It caused me to send a memo to all the CEOs in the West region at the end of last year saying, "Heads up guys, this stuff is going to catch up with you."

On the consumer side of it, most of our institutions don't have very large concentrations of credit card loans or student loans. They're still relatively small. So I'm not at the point yet of having a lot of concern. To the extent that they get more and more involved in it, we'll start paying more attention.

Do you see anyone following in H.F. Ahmanson's footsteps and shrinking their business?

ROBINSON: Ahmanson has been the most visible in that process. What they're talking about doing particularly is shrinking their portfolio of home loans. I presume what that means is that they become more of a mortgage banking operation. I doubt they will shrink from making mortgage loans, they'll just make them the way Countrywide makes them. I would expect that strategy to be something that other people look at.

If your bottom line is return on equity, and you can't make an acceptable return by making mortgage loans and funding them with relatively higher cost liabilities, then the obvious choice is maybe you should shrink the balance sheet. Home Savings (Ahmanson's subsidiary and the nation's largest thrift) is sort of forcing people to look at that.

Washington Mutual, up in the Pacific Northwest, has just bought a couple of commercial banks. They're starting to shift their overall portfolio, putting a little bit more in the way of commercial lending in their portfolio. They're not doing it in a massive way, but they're starting to build their growth in a different direction.

What keeps thrift returns lower than banks? Is the mortgage business simply less profitable?

ROBINSON: Well, there's certainly less spread in the business, by definition. Whether it's intrinsically less profitable, capital markets theory would tell you no. The hooker that's thrown in there is the presence of Fannie and Freddie, which in classical economic terms I would argue is almost a market failure. It's a government-subsidized competitor. That may, by definition, make the mortgage business less profitable.

Any other worries?

ROBINSON: I worry about profits. That thrifts make profits at all, and profits enough to continue to attract capital to the industry. Because that's the long-term survival issue. Particularly if we hit a rough spot in the road, and there will be rough spots in the future.

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