Talk about neurosis in financial services: An identity crisis around whether being a thrift is a bane or bonus. Thrifts want to become bank- like; nonbanks want to create thrifts.

Maybe the confusion starts with the federal love-hate relationship with thrifts. A 1996 law bailed out the Savings Association Insurance Fund by merging it with the Bank Insurance Fund; now thrifts are no longer saddled with high insurance premiums. However, the same legislation called for joining the two charters in 1999. Yet Congress also loosened operation restrictions and cut thrift costs. It doubled the amount of commercial loans a thrift may make and eased the "qualified thrift lender test" by allowing credit cards and student loans.

Then on July 1, 1997, the Office of Thrift Supervision dropped the "start up" capital to charter a thrift by one third, to $2 million. This highlights the advantages of being a savings institution. Holding companies that own only one thrift may engage in broad financial, commercial or industrial business. They can also branch out nationwide and operate under one set of federal rules.

So the rush is on for nonbanks to take advantage of this loophole before 1999, when the thrift charter will disappear. Or will it?

money makes a difference

The Economic Growth and Regulatory Paperwork Reduction Act of 1996 which combined the funds only contemplates the elimination of the thrift charter, according to Paul Allan Scott, national director of bank regulatory services, Coopers & Lybrand LLP. "It talks about having one charter one fund, but does not require thrifts to convert to bank status, (nor) eliminate the chartering of a federal savings and loan under the homeowner's loan act." Thrift charter elimination is a provision of HR-10, the massive reform bill under discussion.

Fortunately, Western Financial Bank (WFB), an Irvine, CA- based, federally chartered and insured savings and loan, has a clear vision for its future and the money to make it viable (market capitalization of more than one half billion dollars), regardless of regulatory vagaries. With $3.7 billion in assets, WFB has just transformed itself into a diversified financial services company providing a wide range of depository, investment, commercial banking, real estate mortgage, and equity lending programs in nine months.

WFB's parent company, Westcorp, which also owns WFS Financial, started the bank in 1973. WFS Financial is the nation's second largest independent auto lender, and the fifth largest in securitized loans, originating more than $200 million in loans per month.

In 1995, Westcorp presented an initial public offering for 17 percent of WFS Financial to finance the transformation. "In (my) discussions (about joining) the company, Westcorp chairman and CEO (and majority stockholder) Ernest Rady suggested that the line of demarcation between thrifts and commercial banks was getting thinner and thinner," says WFB president and CEO Donald H. Kasle. "We had a choice of growing in existing lines of business, mortgage origination and servicing, or diversifying (The auto lender expanded its territory, product lines, and marketing.). We decided (on) greater volumes in lines of business, (not) only doing more with what we had, but also getting more to do more."

And that costs more, which can be risky. As long as thrifts limit their products to consumer mortgages, savings, CDs and the like, they can have a favorable cost structure per dollar of assets, typically with lots of dollars for fairly small efforts. But operating costs rise significantly for checking accounts and other kinds of lending, says Rick Spitler, managing vice president, First Manhattan Consulting Group. "For commercial activities, you (need) sales forces, credit review committees, etc. Part of the challenge for banks trying to transform themselves is (not to) add costs more quickly than revenues, (or) cheat any balance," he says.

To become bank-like, thrifts must diversify their asset pools. The loan portfolio of all insured thrifts is $700 billion; $630 billion secured by real estate, mostly in one- to four-family homes, reports Eugene O'Kelly, national industry director for banking at KPMG Peat Marwick LLP. "The 1,800 thrifts hold less than $15 billion in commercial and industrial loans. Disadvantages to the status quo are clear: With their fortunes tied dramatically to real estate, thrifts ebb and flow as interest rates change," he says.

evolution and expertise

WFB began commercial banking operations in 1996. The bank has $50 million in commitments, and just started offering equity lending. According to a 1997 American Banker report, WFB was third in mortgage origination growth, 140 percent in a year. On the servicing side, the bank ranks 66th in the country, with $6.5 billion.

In addition to the time it takes to build balances (one to five years for most thrifts), thrifts need time to gain credibility in their new role, say industry insiders. Loan portfolios held by all banks total about $2.9 trillion, according to a June 30th FDIC report of commercial banks. Thrifts hold $700 billion, 90 percent of which are real estate related. On the other hand, banks hold 35 percent of their portfolios in real estate. "How long does it take to look more bank-like? To some degree, as long as it takes to shift a portfolio to 35 percent real estate-related," Kelly says.

Sources say that veteran talent is an important variable in the transition. In addition to recruiting Kasle from BancOne, the bank hired executive vice president Mike Johnson from Wells Fargo and its first chief information officer, Erin Mendez, from American Savings Banks. "My philosophy (is) to get people with great experience if you're going into a new area. I never want to have heart surgery where the person who opens me up says 'Gee, that's interesting. I've never seen that before,'" says Kasle.

WFB's IT evolution started before Mendez arrived. The underlying Westcorp infrastructure was on a wide area network (WAN), showing a commitment to connect the bank and auto loan company, to improve communications, make information more accessible in a more timely way, and speed up operations. "You do not see many WANs in banks; replacement cost is prohibitive, particularly in large institutions," says Mendez. Typically, banks have local area networks, where independent offices are not linked.

In late 1996, WFB decided to change its systems strategy. WFB now uses CPI for mortgage loan servicing. Commercial banking and retail and equity lending operations were converted to Fiserv-Pittsburgh in June. "We needed the next step in systems capability, or else it 's like trying to compete in today's market using quill pens and eyeshades," says Kasle.

WFS gave the bank the capital and income platform to put its infrastructure into play, reports Kasle. "On day one (it entered commercial banking), WFB could lend up to $70 million to one borrower, one of the largest legal limits of any financial institution based in Orange County," he says.

Aside from Bank of America and Wells Fargo, the market is dotted with banks that typically can lend less than $5 million. "There was no mid- sized, full-service institution in Orange County offering the relationship with its customers that an independent bank provides. We are filling a niche," says Johnson.

How much of WFB's success depends on its location? It takes major upheaval for substantial shifts in asset holdings to occur. Experts say that the California outlook is rosier for savings banks than other parts of the nation. Thrifts are more aggressive and successful in stealing disgruntled customers from larger institutions than elsewhere, and that the rest of the nation may follow their lead.

WFB offers imaged checking account statements, for example; BofA does not. In addition, WFB offers free interest-bearing checking without a minimum balance. Also, since the bank doesn't have a lot of balances to cannibalize, it can offer five percent interest on money market accounts, a hard act for big banks to match.

Service counts, too. WFB branches have an automated sales and services program that puts product information at one's fingertips, walks one through the sales process, and records the number of customers per day, and products sold in a given session. "We put teller and sales systems at every workstation. Branch employees are cross-trained for both functions, but some focus on sales. We do not want to limit a customer's access to information based on whom he talks to," says Mendez.

WFB also enhanced its alternate delivery channels; ATMs, debit cards, a supermarket bank. It will launch a Web site the fourth quarter, and the Fiserv conversion will provide a voice response system.

Is too much of a good thing dangerous? Thrifts like WFB may become attractive takeover targets as their earnings streams become less volatile, sources say. "There are only three thrifts (in Orange County) with a market capitalization of more than $5 billion," says KPMG's Kelly. "The name of the game in the thrift industry is that we will see a strong period of consolidation as they (raise) their market capitalization to compete better," he says.

Kasle is not worried about WFB losing its independence. "Mr. Rady says he is building this bank for the next generation," he says. When pressed, he adds that if someone wanted to acquire WFB for five times book value, he would be the first to vote "Yes."

-bosco tfn.com

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