Southwest Bancshares is living proof of a simple adage: Staying close to home can go a long way in the business of real estate development.

The $334 million-asset holding company for Southwest Federal Savings and Loan Association runs two subsidiaries that invest in real estate development deals. It's a risky business that has meant failure for many S&Ls, but Southwest is on a roll.

For the last 20 years the Hometown, Ill.-based thrift company has done deals in its local market in a 50-50 venture with Hartz Construction. Developer's Funds Involved "We own the projects jointly," said Southwest's president and chief financial officer Richard E. Webber. "I think in the ones [thrifts] that were burned, the developer didn't have as much cash in as we do."

The niche is profitable, but earnings aren't consistent. For the quarter ended June 30, fee income from joint ventures was $122,000, up from $35,000 in the second quarter of 1993.

Over the past five years, Southwest's annual income from joint ventures reached a high of $851,000 in 1989 and a low of $110,000 in 1991.

Market Knowledge Pays

Southwest hasn't experienced problems like other thrifts because it knows its market, analysts say.

In the late 1980s, real estate development proved dangerous for many thrifts, especially for those that had looked elsewhere for loan growth when opportunities in their own markets diminished.

"These guys are doing their real estate development in their backyard," said Gregory P. Anderson, an analyst with the Chicago Corp5.

Further, while other institutions have used joint ventures, "our joint ventures are structured differently than some," Mr. Webber said.

In this case, the builder has a significant stake in the outcome of the project. It "puts up as much cash as we do," Mr. Webber said.

Part Owner of Thrift

Wayne R. Bopp, a thrift analyst with Stifel, Nicolaus & Co., St. Louis, also notes: "The fact that the builder has purchased a 5% stake in the thrift is important."

Southwest's current projects - all residential - include the construction of 435 single-family homes, 230 condominiums, and 56 town houses, according to Mr. Bopp. The largest is a 107-acre development in suburban Orland Hills, with plans for 337 single-family homes.

In addition to supplementing the company's fee income, the residential units also spur mortgage originations for Southwest, although Mr. Webber couldn't pinpoint a specific amount.

Two-Thirds Residential

Nearly all of the company's loan portfolio was real estate loans, with one- to four-family loans making up nearly two-thirds of the portfolio. Nonperforming assets were 0.24% of total loans as of June 30.

The company, which converted from a mutual to a stock institution in 1992, earned $1.5 million for the quarter ended June 30, down 6.58% from $1.6 million a year ago.

Six-month earnings of $3.1 million were down 6.14%. Both declines were attributed to narrower net interest margins. Return on assets for the quarter was 1.77% and return on equity was 11.76%.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.