Barnett May Find Scant Use For New Reservoir of Cash

Having just completed a $100 million issue of convertible preferred stock, Barnett Banks Inc. may have created a paradox.

New funds boost the Jacksonville bank's liquidity and improve its leveraged capital ratio. But a shortage of attractive investments - aside from acquisitions - could force the bank to accept low returns or pursue a risky merger that could erode capital strength and shrink liquidity.

Barnett is just the latest example of a potential predicament that could become familiar at banks with large retail deposits.

"Trying to maintain the width of our spread with slower loan growth is a real challenge," said Barnett treasurer Paris Thermenos.

Barnett already pays very low rates on key consumer accounts such as NOW accounts. That means it can't move those rates much lower, even if interest rates fall further and cut into the yield Barnett can generate from its earning assets.

"If the prime rate comes down again, that will hurt banks with large deposit bases such as Barnett because they won't be able to earn as much on their assets and their funding costs will be relatively fixed," said Cheryl Swaim, an analyst at Oppenheimer & Co. She said Barnett also has to contend with high credit costs related to poor quality loans it made in the past.

Still Interested in Southeast

A smart acquisition would provide a satisfactory yield. And the bank recently expressed renewed interest in Southeast Banking Corp., a troubled institution in Miami that some observers said is a likely candidate for federal assistance.

A merger would be consistent with Barnett's strategy during the 1980s. By gobbling up smaller banks and thrifts in the region, Barnett has built itself into a bank with assets amounting $32 billion, a threefold increase since 1985.

Barnett is also positioning itself to profit if rates rise by increasing its emphasis on floating rate assets and short term securities while locking in fixed rates on more of its funding, Mr. Thermenos said.

Uncertainty on Rates

"We don't feel we can call the turn" in interest rates, he said, but Barnett does not expect the drop in rates going forward to be as dramatic as it was in the first half of 1991.

Its large deposit base makes Barnett liability-sensitive because borrowings mature faster than its loans. That means the bank tends to make more money when interest rates are falling quickly, because its funding costs drop more rapidly than its interest income.

But when interest rates stop dropping very fast, banks such as Barnett have a hard time sustaining that momentum.

Barnett earned $47.5 million, or 70 cents per share, in the first six months of 1991, down from $74 million, or $1.18 per share, for the first six months of 1990.

Shorter on Asset Side

As a result, on the asset side of its balance sheet, Barnett is buying collateralized mortgage obligations with maturities under two years, for example. And the bank has securitized $150 million in 30-year fixed-rate mortgages and sold more than $300 million of long-term mortgage-backed securities, Mr. Thermenos said.

Barnett will probably not increase the size of its long-term investment portfolio relative to the rest of its assets, he said. At the end of the second quarter, Barnett's $4.473 billion investment portfolio was 15.5% of its $28.8 billion in earning assets.

As for funding, Barnett "has created a steeper CD curve," Mr. Thermenos said.

PHOTO : Barnett at a Glance

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