Great Western Is Mining RTC Deposits

By snapping up deposits of thrifts seized by the Resolution Trust Corp., Great Western Financial Corp. is making lemonade out of lemons.

Since initiating the strategy, Great Western has added $5.9 billion to its deposit base, a bank's most dependable and cheapest source of funds. Other means of raising funds, such as common stock and subordinated debt, cost more and are more vulnerable to market fluctuations.

Better yet, RTC rules insulate Great Western from shaky deposits and assets.

"Great Western gets the branch structure and liabilities, and then gets a check from the RTC," said Bruce Antenberg, senior vice president and treasurer. "We use the cash to pay off wholesale liabilities."

Borrowings Decline

Thanks to the new deposits, Great Western reduced its borrowings by $3.7 billion in 1990. At yearend, retail bank deposits accounted for 76% of liabilities, up from about 62% a year earlier. And in a year when many banks and most thrifts reported losses, the $39.4 billion-asset institution earned $193 million, or $1.50 per share, nearly double its 1989 performance.

Under the RTC's rules, buying failed thrifts can give a big boost to an institution's efforts to increase its deposit base. Buyers get institutions with negative capital, keep the deposits, keep the cash payment by the RTC designed to offset the negative equity, and have the option to return the low-quality assets at cost to the government agency.

Great Western followed this strategy when it bought Florida branches of Gibraltar Savings Bank, Los Angeles, an insolvent thrift with $714 million in deposits. Great Western purchased Gibraltar's 18 branches and the deposits and received a check from the RTC to offset Gibraltar's negative equity.

After looking over the assets, Great Western returned what it did not want to the RTC and used the solid deposits to replace funds carrying a higher rate of interest. Great Western followed a similar route when it purchased other Florida deposits and branches last year, and now operates 118 branches in the state.

A strong capital base enabled Great Western to go shopping for these assets, and the thrift plans to keep its capital ratios high and continue making acquisitions, Mr. Antenberg said. Great Western raised $280 million in the subordinated debt market last year and plans to reenter that market soon, he said. In addition, it issued $113 million in convertible preferred stock in May, making it the first large thrift to tap the equity markets in years.

The company has indicated that it will continue to expand in this manner. "Quite frankly, that's why we did the convertible preferred - to put us in shape for new acquisitions down the road," Mr. Antenberg said.

Nonperformers Rise

To be sure, not everything is perfect at the Beverly Hills thrift. Nonperforming assets are on the rise, according to Peter Treadway, an analyst at Smith Barney, Harris Upham & Co. At the end of April, Great Western reported nonperforming assets and restructured loans equal to 3.46% of total assets, higher than the 3.07% reported by H.F. Ahmanson & Co. and well above the 0.99% logged by Golden West Financial, he said. In addition, Great Western's mortgage prepayments are increasing.

But the growth in nonperformers should end as the economy improves, Mr. Treadway said. And with its low-cost funding, Great Western will be poised to make the most of a pickup in loan demand.

Great Western Cleans Up

Insolvent thrifts, branches, and deposits acquired by Great Western Financial Corp. Deposits ($ in millions)

1990

CenTrust Savings $2,200

Miami

City Savings Bank(*) 863

Bedminster, N.J.

Carteret Savings(*) 747

Morristown, N.J.

Gibraltar Savings(*) 714

Los Angeles 1991

Lincoln Savings $1,000

Irvine, Calif.

Pioneer Federal Savings 951

Cleanwater, Fla. (*)Florida branches

Source: Great Western Financial Corp.

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