EDITOR'S NOTE: This story has been corrected from the print version to clarify that OneWest executives have not said they plan to sell the institution.
The biggest thrift in Los Angeles is about to become the county’s second-biggest bank, a move that could signal that the owners of Pasadena’s OneWest Bank are gearing up for a planned public offering.
Though “bank” is part of its name, OneWest is a thrift or a savings and loan association – a designation it inherited from its predecessor, failed mortgage lender IndyMac. Thrifts face limitations on commercial lending and have fallen out of favor with investors, which is likely one reason OneWest has applied to federal regulators to change from a thrift to a bank charter.
OneWest executives have said for more than a year that they plan to take the institution public, though executives reportedly had informal talks with potential buyers last spring and at least one bank investor has mentioned an outright sale as a possibility, according to Reuters. But OneWest’s application for a bank charter bolsters the case that a public offering, not a sale, is the next step.
It’s unlikely OneWest would attempt a public offering while still a thrift, said John Ahn, head of corporate finance at Westwood investment bank B. Riley & Co. Investors prefer banks because they tend to have a more diverse book of business compared with thrifts.
And the industry never recovered from the S&L crisis of more than 20 years ago. In 1988, there were 65 thrifts in Los Angeles County. Today, including OneWest, there are six.
“I don’t think you could go public as a thrift,” Ahn said. “I don’t think anyone in the investment community would invest in an IPO of a lending institution that was a thrift.”
If OneWest’s application is approved, it would be the second biggest among local banks, behind only downtown L.A.’s City National Bank. OneWest’s $25 billion in assets place it $2 billion behind City National, but $2 billion ahead of longtime runner-up East West Bank of Pasadena.
Regulators said they could not comment on the application process.
OneWest executives declined to comment for this report.
OneWest in July quietly applied to the Office of the Comptroller of the Currency in Washington to be regulated as a so-called national bank and to change its name from OneWest Bank FSB to OneWest Bank, National Association.
The five holding companies that own OneWest have also applied to the Federal Reserve Bank of San Francisco to become bank holding companies, a requirement of changing OneWest’s charter.
The Business Journal discovered the applications last week.
Until recently, banks and thrifts had different regulators, different rules about opening branches and different capital requirements. But many of those distinctions were wiped out by the 2010 Dodd-Frank financial reform act.
One of the few meaningful differences remaining is that thrifts are limited in the amount of commercial lending they can do. Thrifts must lend mostly to homeowners and small businesses. They are prohibited from lending more than 20 percent of their assets to business customers. Banks face no such restrictions.
Though OneWest isn’t close to that 20 percent cap, by applying for a bank charter, executives there could be signaling that they intend to further boost its commercial loan business, said Wade Francis, president of Long Beach bank consultancy Unicon Financial Services Inc.
“If you’re a thrift, you’re expected to make a lot of mortgage loans,” he said. “I’m assuming they’re looking to expand into more commercial lending.”
OneWest executives told the Business Journal in 2011 that they wanted commercial loans to make up 20 percent of all loans by 2014. Such loans make up about 13 percent of OneWest’s portfolio now, or about $1.9 billion.
By comparison, commercial and industrial loans make up 30 percent or more of loans at the county’s largest commercial banks, City National and East West.
Growing its business lending portfolio is a priority for OneWest as it is for most banks, which see business lending as a better bet than home mortgages, said B. Riley’s Ahn.
“All institutions are moving toward trying to do more commercial business,” he said. “It lets you diversify out of lending directly to the consumer real estate business. As a thrift, you’re missing out on a huge portion of the market.”
More commercial loans and a bank charter could make OneWest more attractive to either a buyer or investors in a public offering. OneWest’s owners, private equity investors led by Chairman Steven Mnuchin, a former Goldman Sachs partner, and billionaires George Soros and John Paulson, said almost from the start that they planned eventually to sell OneWest.
The investors put $1.55 billion into IndyMac when they took it over from the Federal Deposit Insurance Corp. and reaped huge returns because the FDIC absorbed most of the losses on the bank’s bad loans. It was one of the sweetest – and last – such deals struck by the federal corporation, which later blocked other private equity groups from buying failed institutions.
Though the owners would likely prefer to sell OneWest to another bank, the number of potential buyers is small, making a public offering the more likely route, said Bert Ely, an Alexandria, Va., bank analyst familiar with OneWest.
“The problem they have is their size,” Ely said. “If they’re going to be acquired by someone, it would have to be a pretty big someone. That’s why an IPO makes sense.”
And if an IPO is in the works, changing charters is vital. Not only can banks do more commercial lending, which investors like, but bank investors might have an aversion to thrifts based on outdated distinctions between the two types of institutions, said Wayne-Kent Bradshaw, chief executive of Broadway Financial Corp., the parent of Broadway Federal Bank, one of the few remaining thrifts in Los Angeles.
“About 90 percent of what banks and thrifts do is the same, but the market would respond much better to a bank in an IPO,” he said. “The market knows banks. If you’re a thrift, a lot of the market might not have the interest or knowledge about what you do.”
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