Calif. Thrift Deals Could Alter Index for ARM Rates

Just one or two California thrift acquisitions could significantly alter the key cost-of-funds index that determines interest charges on many adjustable-rate mortgages, according to a securities analyst.

In a recent report, Jeffrey Naschek of Salomon Brothers Inc. argued that, with 75% of the value of the 11th District Cost of Funds Index, or Cofi, derived from costs at just seven large thrifts, the index is extremely sensitive to mergers.

As a result, large thrifts, like H.F. Ahmanson & Co.'s Home Savings, Irwindale, and Great Western Bank, Chatsworth, are de-emphasizing Cofi adjustables, Mr. Naschek said.

The seven thrifts whose cost of funds constitutes most of the index include some of the hottest acquisition candidates in California. The seven are: Ahmanson, Great Western, Golden West Financial Corp., California Federal Bank, American Savings Bank, Glendale Federal Bank, and Coast Savings Bank.

An acquired institution would have to leave the San Francisco Federal Home Loan Bank to be excluded from the index. Clearly, not all will choose to do, as shown by the continued membership of Irvine-based American Savings Bank despite its acquisition last year by Washington Mutual Inc., Seattle.

Mr. Naschek reasoned that this is in part because American Savings continues to fund itself above the index level, thus helping to keep the index high. But American could quit if its funding costs fell below the mean as cheaper checking accounts replaced its customary certificates of deposit, he said.

Then, even while leaving the Home Loan bank, American would avoid depressing the overall index to its own detriment. American holds roughly $20 billion of adjustable-rate mortgages linked to the index.

Another possible acquisition-of Great Western by Washington Mutual-would increase the index figure, Mr. Naschek wrote, because Great Western has consistently been a low-cost funder.

Indeed, he calculated that if Washington Mutual acquired Great Western and then pulled both it and American Savings out of the index, the Seattle company could stand to gain as much as $23 million on the combined Cofi ARM assets-$46 billion-at the two thrifts.

In an interview, Mr. Naschek said that he believes such considerations are entering the deal calculus in California.

By far the least favorable acquisition-from the point of view of Cofi investors, typically thrifts-would be that of Golden West Financial's World Savings and Loan Association, whose heavy use of certificates of deposit has made it the most expensive funder among the big thrifts. That's also among the least likely deals, given the thrift's traditional mortgage focus, observers said.

For reprint and licensing requests for this article, click here.
MORE FROM AMERICAN BANKER