companies, not vice versa. But Collateral Mortgage Ltd. has gladly swum against the tide, and captured plenty of business along the way. The Birmingham, Ala., mortgage company established New South Federal Savings Bank 10 years ago as a way to achieve ready access to capital and expand business. "We thought it was good business," said Robert M. Couch, Collateral Mortgage's president. And, since the 60-year-old company had no intention of losing its own independence through a merger, "We determined the best way to that was to start a bank." Collateral Mortgage did just that, with $20 million of capital. The institution has since grown to $730 million of assets, making it the largest savings bank in Alabama. Last year, Collateral's owners bought New South Federal from the mortgage company, putting it on equal footing with the mortgage unit. The status is especially appropriate for New South Federal, which has truly come into its own, said A. Winston Porter Jr., president. "Now, the bank is another source of funds for Collateral," not its sole source. "It's a natural progression," Mr. Couch said. "The bank has gotten up to size and is looking for opportunities itself." But, Mr. Couch added, "We still try to work in concert with each other." Indeed, New South Federal makes mortgage loans - to people with impaired credit histories - and also refers customers to Collateral Mortgage for conventional loans. Collateral services $1.8 billion of its own loans and also services $619 million of New South Federal loans through a contract. The New South Federal stature is a far cry from just a few years ago, when it operated with other ambitions in mind. "In essence, they were a warehouse for the mortgage company," Mr. Couch said. Now, the ties may not be as tight, but they are certainly felt within both organizations. Aside from product alliances, the mortgage company's business methods appear to have been largely adopted by New South Federal. The savings bank "very actively" sells its auto and commercial loans into the secondary market, Mr. Porter said. That unbankerly approach sits well with the parent. "Banks typically plan to have loans on their books until they are paid off," Mr. Couch said. "Mortgage bankers look at every loan as available for sale." By selling loans, banks can reduce volatility when refinancing waves hit. Analysts said the boom the industry experienced in 1993 drives home the point. Many portfolio lenders were hit hard by refinancings that drained their portfolios, but New South and Collateral both weathered the storm. Sales of the loans also permit the savings bank to put the value of its originated servicing rights on the books and show an immediate profit. "We have been through many cycles and knew what was coming," Mr. Couch said. The company adjusted its work force by using temporary staffers who could handle a lot of volume and then be released when business fell, he said. Such a strategy was adopted by many lenders during the refinance boom of 1993, but some were slow to cut back when volume dropped. Mr. Couch said the bank and the mortgage company are now seeing a resurgence in borrower interest. Banking on that, Collateral has opened four offices this year, bringing their number to 36 from Virginia to San Antonio. New South Federal has also opened offices this year, in Florida, and hired loan officers who were with American Savings until their branches were purchased by First Union Corp.

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