Fiscal Fitness

By Richard J. Martin

Want to survive tough times? Just manage your business as Ohio Savings did. . . as if someday you had to hand it over to your kids.

p>There was little to hold them back. After Congress loosened the regulatory reins in the early eighties, savings and loan executives leaped onto the same high wire as the rest of the financial community, investing in junk bonds and speculative real estate deals. Returns of 15 percent and more were too enticing for them to turn down.

Then there was Bob Goldberg. Boring Bob Goldberg, or at least it seemed so back then.

Goldberg, 52, is president of Ohio Savings Bank and one of three brothers who run the Cleveland S&L. Through their family, the brothers control 65 percent of the closely-held bank which, with nearly 1.55 billion in assets, ranks as the 160th largest S&L in the country. At the same time that other bankers were scrambling for the highest yields, Goldberg was pushing himself away from that table full of goodies. Determined to protect the bank against volatile interest rates, he was selling off fixed-rate mortgages at 13 percent and reinvesting the money in variable-rate loans at 10 percent. This alone cost the bank about $6 million in one year. "It was a hell of an insurance policy to pay against rising rates," says Gerald Goldberg, Bob's 49-year-old-brother and executive vice-president of the thrift.

If the premium was steep, a lot of unemployed bankers these days probably wish they'd paid it, too. As the chart below shows, Ohio Savings Bank has maintained vigorous results while the rest of the industry has headed for intensive care. It's 0.68 percent return on assets in 1989 ranked it 38th among the 237 S&Ls with assets of more than $1 billion. It ranked fourth in net interest margin.

How did Ohio Savings turn away from temptations that other banks found irresistible? By managing the business for the long term, as if someday it would be handed over to the kids.

In the Goldbergs' case, that was literally true.

On the wall in Bob Goldberg's office is a page from the family album, a picture of a fruit store in Cleveland. It was purchased by his father in the twenties with a mortgage from Ohio Savings Home Loan and Building Association Co. In 1961, the family bought the bank.

Those were good days for S&Ls, and for the Goldbergs' new venture as well. You didn't have to be a genius to run a profitable S&L at that time. Protected by government regulation from the vicissitudes of the marketplace, S&Ls were a low-risk business that enabled generations of Americans to buy their homes. For industry executives the 3-6-3 rule prevailed: pay depositors 3 percent, charge mortgagees 6 percent, and meet at the golf course at 3 p.m.

That formula worked well enough until the late seventies, when inflation pushed short-term interest rates as high as 20 percent. Stuck with fixed-rate mortgages in the single digits, most S&Ls moved into the red in the early eighties. To help the industry become more competitive, Congress phased out the limit on the interest they could pay depositors and, step by step, freed them to invest in commercial real estate and a wide array of financial instruments.

Coming as they did in the fastest of Wall Street's go-go years, these new freedoms brought temptations that were too difficult for most S&Ls to resist. Junk bonds at 18 percent, shopping centers and office buildings built with tax laws rather than tenants in mind — all deals meant to make a quick killing. With little of their own capital invested, and the Government insuring the depositors' money, most industry executives had little to lose.

Not so the Goldbergs. "When my brothers and I make business decisions, we are dealing with a lot of other family members' money," says Bob Goldberg. "We're not trying to build a business so we can sell it for a profit. This is a family company and we wanted to keep it in the family for the next 100 years, so we tended to take a more conservative approach than many other savings and loans.

"Our father taught us that the business must be maintained for the good of the whole family. We could see that the strategies other savings and loans were taking meant assuming higher risk loan portfolios and we did not want to do anything that would jeopardize the financial stability of our bank or our family's welfare. There's three of us here, but we have a lot of people in the family for whom we work — 23 of us, including our mother."

While other thrifts took off on a ballistic expansion, the Goldbergs cut back on their marketing and loan operations and eased the personnel into other departments. They stopped writing fixed-rate mortgages and sold the ones they had, even if it sometimes meant taking a modest loss. They concentrated on adjustable-rate mortgages that allowed them to match these investments to the current cost of deposits. They tightened their credit standards and worked only with the very best credit risks. Every time loans were repaid, they took the cash and repaid their own high-cost loans to the Federal Home Loan Bank.

The strategy had an immediate negative impact on the bank's earnings. Early paydown of FHLB loans carried penalities. I remember writing a check one year for over $700,000 in penalties," says David Goldberg, also an executive vice-president at Ohio Savings, and the youngest brother of the trio at age 46.

"We had some employees and a few outside directors who were concerned. They were looking at other S&Ls who were busy expanding. But most were with us," says Bob.

"Never again did we want to be vulnerable to rising interest rates. The only way to do that was to forego current earnings, even penalize them, in a determined effort to improve the bank's balance sheet by matching the return on investments to the current costs of deposits on an ongoing basis."

"Our adjustable rate portfolio is one of the best matched in the country," says Gerard Goldberg. "We can't get hurt by either rising or falling rates."

Simple survival wasn't the only goal that motivated the Goldbergs. They wanted the bank to grow as well.

But not at any cost. They grew the old fashioned way, by identifying promising niches and taking prudent risks. The brothers expanded their operations to a lucrative new market, Florida, and took a small but profitable bite out of the credit card business of Citicorp, the largest card issuer in the world. "They are a curious blend of conservative and aggressive," says Richard Osborne, an Ohio Savings director and executive dean of the Weatherhead School of Management at Case Western Reserve University in Cleveland. "They are determined to add value to shareholders, but they are very conservative in the way they do it."

Their acquisition of Palm Plaza Savings Bank (since renamed AmTrust Bank) in Florida in July 1989 is a prime example of the brothers' style. They agreed that future generations of the family would benefit from a broader geographic base that included the Sunbelt. They considered Florida and Georgia. But one opportunity after another was weighed and then dismissed.

Finally a small thrift in Florida became available. Ohio Savings was already familiar with the area as a result of some loans it made to a developer there. When the Goldbergs acquired the Florida thrift, it was in poor shape: Its deposits totaled $32 million, largely from high-cost brokered funds, and operations were losing $20,000 per month. But the brothers were convinced it was the least risky means of entering that market.

"Lowest cost means lowest risk," says Bob, "and this was cheaper than chartering a new bank. We had enough confidence in our marketing ability to think we could build it up fast."

The Goldbergs moved quickly to consolidate their new southern beachhead. They shed unprofitable deposit accounts by cutting rates drastically. Bob wanted to start advertising and promotions immediately, but his brothers thought it better to wait and invest in advertising when it would benefit all three of the bank branches that were planned. "So we waited," says Bob.

By December, the new bank was breaking even, although it had only half the original deposits. Once they had this profitable base, the Goldbergs added another branch in March and a third in April. Now supported by an advertising campaign, the branches are busy making loans. Within 10 years, they hope to have a Florida operation that accounts for 10 percent of Ohio Savings' business.

Their credit card business shows that a low-risk approach can also be truly innovative. The Goldbergs' S&L was the first Ohio thrift to introduce credit cards. In the early years it was just like any other bank card: standard 18 percent finance rate and $25 annual fee. Their credit card portfolio earned standard profits and languished at a modest $5 million.

Looking for a way to grow without incurring a lot of credit risk, the brothers decided to lower their rate from 18 percent to 14.75 percent and drop the annual fee from $25 to $18. That strategy, they figured, would probably draw enough new accounts to double their portfolio and still maintain level profits. The key was to control the losses through stringent credit standards. Relying only on a gut feeling, the brothers decided that the way to do this was to market the card only to people with good credit histories who rely on credit card debt regularly. The "hook" would be to offer them a chance to "refinance" these loans at a lower rate, as many S&Ls did when they advertised the refinancing of mortgages.

They took dead aim on the big national commercial banks such as Citicorp that were charging up to 19 percent. The response was overwhelming: In three years, Ohio Savings' credit card portfolio has surged to $150 million, its Visa and Master Charge cards are used by one out of four households in their market, and the card received recognition as "one of the best deals in the country" by national publications such as Money and Bank Rate Monitor.

The new credit card portfolio is even more profitable than most, since they only market to "revolvers" — credit card holders who do not pay down their debt immediately but are always paying interest. Nearly 90 percent of its credit card holders are revolvers, versus a more normal 66 percent.

The Goldbergs keep waiting for competitors to take aim on the niche they've created. A few other thrifts have made failing attempts. The banking giants can't — they would have to generate huge numbers of new accounts to cover the costs of cutting returns by several percentage points on their already giant portfolios. "Not bad for a move whose downside was the initial advertising expense and the loss of a few percentage points of profit on the $5 million portfolio," muses Bob today.

In typical fashion, he also sees insurance value in the credit card portfolio. "Our cardholders can't get a better rate anywhere. So if the bank ever runs into hard times, we can raise rates by as much as 2 percent and still be below market."

While Bob Goldberg sits atop the organization chart, he doesn't run the show by himself. All three brothers must agree before the bank can make a big strategic move into Florida or into a new segment of the credit card business.

No votes are taken, no hands are raised. If even one brother feels uncomfortable about an idea, it's vetoed. They pride themselves on the fact that they do not argue or try to convince a dissenting brother about management decisions.

The three brothers work closely together. In fact, their offices are within 50 feet of each other. There's no need for planned meetings because they see each other several times a day to discuss business. Memos to each other consist of brief, handwritten messages, such as "Let's get together to discuss the Florida operation."

Each has his primary areas of responsibility with complete authority to act alone: David handles operations, including branch administration, personnel, and data processing; Gerry handles marketing, lending, and legal functions; Bob is responsible for audit and accounting, and works with the largest borrowers.

"We don't discuss 90 percent of our daily decisions," says Bob. "We don't get together unless someone wants to do something major, or stop doing something, or there's some question in that person's mind. Then we sit down and discuss it."

When needed, the discussions are short. "As kids, we did everything together. I slept in Bobby's room for eight years," says Gerry, "and then in David's — so we know each other well. And when three people work together as long as we have, we can sit down together at a meeting and know exactly how the other person is thinking."

What they'll be thinking about in the year ahead is the possible purchase of insolvent thrifts from the government's Resolution Trust Corp., the new entity set up by the bailout bill passed last August. So far, they've done nothing more than pay $7,500 for the lease and fixtures of one S&L, which they turned into another Ohio Savings branch.

They've made a few unsuccessful bids for distressed thrifts that are on the block. "Not aggressive enough," says Bob. It's more likely that, for a group of bottom fishers, the market hasn't quite hit bottom. It all goes back to the basic idea of taking prudent risks in pursuit of opportunities that can pay dividends over generations.

"Part of the reason Ohio Savings resisted the temptations that other institutions succumbed to is the Goldberg brothers' ability to adopt a long-term horizon in the context of a life-long family business," says outside director Osborne. "When your own net worth is at risk, you treat business decisions in a different light." — F.B.


The savings and loan debacle is going to be with us for a long time. The numbers are staggering. Of the nation's 2,878 S&Ls at the end of 1989 (already down from 3,246 in the past four years), 700 are insolvent and have to be merged, sold, or put under government conservatorship. The industry continues to pile up losses at an estimated $5 million or more a day. Losses hit a record $19 billion in 1989, up 43 percent from the already astounding loss of the year before, Many experts say that the cost of the government's bailout of the industry will far exceed the official estimates of $50 billion through 1992, and as much as $300 billion to $500 billion over 40 years. One study calculates a cost of $1.4 trillion over 40 years.

Other costs are even more unfathomable: the rise in interest rates caused by the huge sales of government bonds to finance the bailout; the impact of the forced sale of huge chunks of real estate now owned by the government; the scandals and influence-peddling that are coming to light; and the creation of a huge new bureaucracy in Washington to mess with the mess.


Ohio Savings assets have fluctuated. . . while nationally, assets have risen sharply.

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July/August 1990

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