Irvine-based thrift operator Westcorp shares the same street address with subsidiary WFS Financial Inc. But getting closer has proved difficult.
Despite a key regulatory delay, the two companies are sticking with a complex plan hatched in early 2004 to turn one of Orange County’s largest homegrown thrifts into a commercial bank.
The plan also would bring auto financier WFS Financial back into the fold. Westcorp owns about 85% of publicly traded WFS through its Western Financial Bank unit and is seeking to buy the rest.
Westcorp tried to buy out WFS in 2002. But the companies couldn’t settle on a price and the deal was scuttled.
The company’s latest buyout offer is 11% more than WFS’s market value, which was $2.4 billion at recent check.
The stumbling block in Westcorp’s latest bid to acquire WFS has been getting Federal Reserve approval for a two-step process: converting Western Financial Bank from a thrift to a bank and converting Westcorp into a bank holding company.
Westcorp said in March that Federal Reserve approval was taking longer than expected and could happen in the second half of the year, “if at all.”
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Rady: owns about half of Westcorp |
Last year, the Federal Deposit Insurance Corp., Office of Thrift Supervision and California’s Department of Financial Institutions signed off on Westcorp’s plan.
As planned, WFS would fall entirely under the Westcorp banner again, as it was before part of the auto financier was spun off in 1995 as a way to boost the value of the business.
The change would cut the cost of running two publicly traded companies and spur growth in auto loans, according to analysts.
As a bank, Western Financial Bank would get out from under a thrift regulation that limits how much it can hold in auto loans. It also would allow WFS to fund more auto loans with deposits, a cheaper source of funding.
WFS now gets most of its funding from loans bundled as securities and sold to Wall Street.
The Fed has raised “some questions and potential concerns” about the reorganization, according to Westcorp. Ernest Rady, Westcorp’s chief executive who owns about half of the company, has declined to elaborate in conference calls about the confidential process.
Wall Street doesn’t seem overly concerned. Westcorp’s shares are up nearly 40% for the year with a market value of about $3 billion last week.
Westcorp’s niche,auto loans,could be the sticking point with the Fed. The Fed’s board of governors could be hesitant to elevate Westcorp to a bank holding company because it deals primarily in auto loans, as opposed to more traditional mortgages, analysts said.
“I really think we’re in a period of time where the Fed doesn’t understand non-mortgage balance sheets and it’s a learning process,” said John Hecht, analyst with JMP Securities in San Francisco.
The change would free up and streamline things for Westcorp. Under federal regulations, Western Financial Bank now can’t have more than 35% of its assets in loans other than mortgages.
Western Financial Bank gets around the rule now by not counting loans serviced by WFS.
Western Financial Bank, with roughly $15 billion in assets, also makes construction loans, mortgages on apartments, commercial buildings and homes, and does business lending from some 20 branches.
Company officials said they are mulling backup plans should the Fed reject their proposal. Westcorp has said it plans to pursue another strategy by year’s end if the proposal is shot down.
Other options for Westcorp could be a sale of Western Financial Bank.
Earlier this year, another local auto financier, Newport Beach-based United PanAm Financial Corp., sold off its thrift operation to focus on funding loans via credit lines and securitizations.
Or Westcorp could apply for a license in every state to buy and sell auto loans regardless of what happens to the thrift. That process is under way.
“If they don’t get the (bank) charter, then Westcorp will get a direct license in each state (for auto finance),” analyst Hecht said. “One option could be to sell the bank and use commercial or warehouse lines of credit.”
Westcorp officials declined to comment on their plans, citing ongoing talks with regulators.
“There’s nothing more to say other than what has been released for public record,” spokeswoman Carin Roberson said.
“The approval process for the conversion is taking longer than originally expected, and the company is currently exploring other alternatives in the event that the proposed conversion and related merger cannot go forward as planned,” Westcorp said in a recent filing with the Securities and Exchange Commission.
There could be an unintended consequence from Westcorp’s bid to streamline operations, according to analysts.
The restructured company could catch the acquisitive eye of big banks. One of this year’s bigger deals is Bank of America Corp.’s pending buy of credit card company MBNA Corp. for $35 billion.
Next up for consolidation could be auto finance, according to analysts. That could be a factor in Westcorp’s continued stock gains amid uncertainty about the restructuring.
Bank of America made a move into the market last month with a deal to buy $55 billion worth of auto loans from General Motors Acceptance Corp.
“There is nowhere else for banks to grow,” said Jason Stewart, who recently left as an analyst with Friedman Billings, Ramsey & Co. to join a hedge fund in Virginia.
