Crestar Financial Corp. of Richmond, Va., is taking the plunge into California's lucrative student loan business.
The $18.5 billion-asset company agreed to purchase a $370 million student loan portfolio from Great Western Financial Corp. of Chatsworth, Calif.
Great Western, which is restructuring its various business lines to bring down operating expenses, will receive $13.8 million after taxes for the portfolio.
"This lays a stake in the ground in California," said Clark McGhee, Crestar's vice president in charge of student lending. "It represents a major foundational presence for us in the state."
The acquisition brings Crestar's student loan business up to about $900 million and puts the company among the top 25 lenders in the business nationwide, Mr. McGhee said.
But the most appealing aspect of the deal for Crestar is the opportunity it brings in California. The state is home to nearly 10% of all the student lending business in the country, Mr. McGhee said.
One out of every 10 students nationwide is either a resident of California or attends a college there, he added.
Though the bulk of the acquired portfolio is in California, it also includes loans from Florida and Arizona.
Crestar, which has been in student lending for about 30 years, makes most of its loans in Virginia, Maryland, and the District of Columbia.
The bank has a limited presence in California and Florida, by virtue of its mortgage business. Mr. McGhee said that though the bank is still examining how to operate its new student lending business in these states, he expects significant growth in terms of investment and staffing - perhaps by as much as 25%.
Crestar has "been growing a lot through acquisitions of small banks and thrifts, which tend to be deposit rich," said Salomon Brothers analyst Carole Berger. "So this is a way to put those funds into higher-yielding assets and get a pickup in profitability."
The deal is also an example of companies reviewing their various business lines to determine future viability. For Great Western, the student loan business was not large enough to generate adequate returns, an official said, so it will use the proceeds of the portfolio sale to develop other business lines, such as consumer lending.
For Crestar, the acquisition boosts economies of scale - a key to profitability in this niche, analysts said.
"It makes them a player," said Anthony Davis, analyst at Dean Witter Reynolds. "It gets them to the point where they can be a competitor in terms of cost, visibility, and presence."