Lackluster profits in the home loan business are driving Glendale Federal Bank to cut back on its mortgage holdings in favor of higher- yielding small-business and consumer loans.
Late last year, the $16 billion-asset thrift announced plans to sell $1.8 billion of mortgage-backed securities - almost half of its portfolio. The sale proceeds will mostly be reinvested in the thrift's new high-yield loans.
Meanwhile, home loan production is also down at Glenfed and the thrift expects that in five years its $12 billion loan portfolio, now almost exclusively made up of mortgages, will be evenly divided among mortgages, small-business loans, and consumer loans.
In an interview, chief executive Stephen J. Trafton said the thrift was changing its strategy because of falling margins in the mortgage business.
The market is saturated with mortgage banking companies and other thrifts, and loan volumes are low, he said.
"The spreads are narrowing and the profitability of that business is simply not enough to justify the existence of a separate thrift industry," Mr. Trafton said. "That's been our basic philosophical premise."
To survive, thrifts must become a part of the financial mainstream, Mr. Trafton said.
For Glenfed, this means taking on California's large commercial banks - Bank of America, Wells Fargo, and First Interstate - in the competition for checking accounts, small-business loans, and consumer loans.
Mr. Trafton said he hopes that consumers and small-business owners who are dissatisfied with the impersonal service at large banks can be won over to Glenfed.
Many of California's big thrifts have undertaken similar strategies as they attempt to counter low profits on their core mortgage business with higher-yielding loans.
The nation's largest thrift, Home Savings of America, Irwindale, Calif., says that because of low spreads on its mortgage business, it will increasingly sell the loans it makes - fixed-rate and adjustable - rather than holding them in portfolio. In five years, Home Savings says its $50 billion-asset portfolio could be as much as 40% smaller, and the thrift will return capital to shareholders through stock repurchases.
At Glenfed, Mr. Trafton said he had no plans to return capital. If the thrift succeeds in changing its funding mix to include a large volume of cheap checking accounts, supplementing the more expensive certificates of deposit, Glenfed will likely maintain a sizable portfolio of mortgage loans, he said. If not, the thrift will function more as a mortgage bank, Mr. Trafton said.
Some thrifts, most notably Golden West Financial, prefer to avoid gathering of deposits with low interest costs because providing associated services generally involves high fixed costs.
