S&L;: Wells Fargo to Buy Great American Branches for $492 Million : Great American to Sell Its Branches to Wells Fargo

Wells Fargo & Co. said Tuesday it has agreed to buy all of troubled Great American Bank’s 130 California branches for $492 million in a deal that will greatly strengthen Wells Fargo’s market position in Southern California.

The sale also represents a desperate bid for survival by Great American, a former beacon in the savings-and-loan industry that has fallen on hard times with the deterioration of its Arizona loan portfolio. The San Diego-based thrift sold the branches to raise badly needed capital to meet regulatory requirements. But, in ridding itself of key assets, it may have impaired its ability to earn profits, analysts say.

Although the acquisition is a bold statewide move for Wells Fargo, Vice Chairman Clyde W. Ostler stressed at a press conference Tuesday that it gives the San Francisco-based bank something that it has long coveted: a dominant market presence in fast-growing San Diego County. The deal, which includes 64 branches in San Diego County, thrusts Wells Fargo into the No. 1 position for deposits among banks and thrifts in the county.

In the past, Wells and other banks have found San Diego County a hard market to crack because deposits have been largely controlled by locally based S&Ls; such as Great American, HomeFed Bank and Imperial Savings. In fact, Wells Fargo outbid three other banks for the Great American branches. Among the reported bidders were Bank of America and a joint venture of Security Pacific Corp. and the Robert M. Bass Group, owners of American Savings.

The branch sale will result in significant layoffs at Great American’s San Diego headquarters office. Great American Chief Executive Robert L. Kemper, who took over the S&L;’s reins two weeks ago, told analysts Tuesday that he soon will begin making drastic cuts in the S&L;’s overhead expenses and that the jobs of 700 Great American employees are in jeopardy.

One Great American executive who asked not to be named said employee layoffs will be “significant” and could begin as early as this week.

Great American depositors will not be affected until the branch sales are completed. At that point, Wells Fargo will honor the rates, terms and conditions of all fixed-term accounts such as certificates of deposit while adjusting rates on transaction accounts such as checking and savings to its going rates of interest.

Although Great American would receive what analysts describe as a rich price for its branches, the deal calls into question the thrift’s ability to survive. On a pro forma basis, the remaining Great American would be left with $9 billion in assets, down from $15.4 billion as of March 31. About 21% of the remaining assets are “classified,” or problem loans that are likely to produce a loss.

Wells Fargo will acquire Great American’s “crown jewels,” or high-quality branch loans, while leaving the S&L; with all of its problem loans, foreclosed real estate and low-yield mortgage-backed securities, said James G. Valleo of Valleo, Cobb & Co., a Los Angeles investment banker specializing in thrift institutions.

“You may not have much earning power left in the surviving institution,” Valleo said of Great American.

Also in doubt is whether Great American will keep its headquarters in San Diego, now that its remaining operations will be centered on its 81 branches in Arizona, Washington and Colorado. Kemper said the S&L; signed a non-competitive agreement with Wells Fargo that bars it from collecting deposits or opening branches in California once the branch sale is complete.

Still, Kemper said no decision has been made to move Great American’s headquarters out of San Diego. But he did say that he is in negotiations with developers of a downtown skyscraper dubbed Great American Plaza--which Great American was to have moved into next year--to void the S&L;’s lease of 140,000 square feet.

The transaction would be a two-phase deal calling for Wells Fargo to acquire a total of $6.4 billion in deposits and $5.9 billion in loans. Wells said the sales price works out to a 6.15% premium on deposits to be acquired, a high price that analysts said reflects the value of Great American’s branch network and market leadership in San Diego County.

The first stage of the sale, to be completed by year-end, would transfer ownership of Great American’s 92 offices in San Diego, Orange and Riverside counties as well as the S&L;’s operations center in National City. The second stage, to be completed in mid-1991, would involve the transfer of Great American’s remaining 38 statewide branches to Wells Fargo.

Completion and timing of the second stage are subject to several contingencies, including the stability of deposit levels and asset performance. In a statement, Great American said it is possible that the sale’s second stage “may therefore ultimately not be completed.”

The deal means that depositors at Great American’s California branches will become customers of Wells Fargo, if the transaction is approved by shareholders and regulators. Officials of both firms noted that Wells Fargo will be in communication with those depositors to provide comfort and prevent “deposit runoff.” It is too early to tell if the rates to be paid by Wells will be significantly different than those paid by Great American.

Analyst Allan Bortel of Sutro & Co. in San Francisco described Great American’s chances of survival as “very difficult. That’s what the stock was saying today.” Great American stock closed down $1.25 per share, at $2.125, while Wells Fargo closed up $1.375, at $80, in New York Stock Exchange trading.

Blaine Roberts, president of Morgan Roberts & Co., a La Jolla investment firm that has a significant stake in Great American stock, said the stock’s decline on Tuesday may be due to “the open-ended nature of the transaction and that there is no closing date. That gives Wells Fargo four or five months to chip away at the (purchase price) if deposits decline.”

Most analysts hailed the acquisition as a good move for Wells Fargo, however. With 24 branches and $1.6 billion in deposits already in San Diego County, the acquisition of Great American’s 64 branches and $5.5 billion in local deposits gives Wells a combined deposit base of $7.1 billion, or 16% of combined bank and S&L; deposits in the county.

Thus Wells would overtake HomeFed Bank, now in first place with $6.5 billion in local deposits at 64 San Diego County branches.

Amounting to a 17% addition to Wells Fargo’s total deposits of $37.2 billion, the acquisition still leaves Wells Fargo in third place in statewide deposits after Bank of America and Security Pacific, a spokeswoman said. Statewide, Wells Fargo operates 486 retail branches.

Wells Fargo will inherit about 1,600 Great American employees through the acquisition. Although Ostler said that Wells expects to close 20% of the 88 countywide branches resulting from the acquisition, he said the bank still has not determined how many of those employees would eventually be laid off under consolidation.

Even with proceeds from the sale, Kemper suggested that Great American may need to raise significant additional capital to survive. The S&L; disclosed Tuesday that its financial condition was further battered by an additional $176 million in loan-loss provisions as a result of an audit of its California loan portfolio conducted during the second quarter ended June 30.

Great American’s second-quarter net loss, which will be released Friday, should exceed $100 million.

Great American was forced into the sale by steep losses this year and last year that severely depleted its capital base. A recapitalization plan accepted by the federal Office of Thrift Supervision in April specified that Great American raise $350 million in capital or restructure by the end of this year, or risk a government seizure.

At the Tuesday press conference, Kemper said Great American tried to sell itself in total but could find no buyers. The S&L;, which as of March 31 had $15.4 billion in assets, making it the eighth-largest S&L; in the nation, also tried unsuccessfully to raise outside equity capital.

COUNTY REACTION: San Diego County leaders mourn loss of local S&L.; D1