May 7 (Bloomberg) -- Wachovia Corp., the fourth-biggest U.S. bank, may offer to buy Golden West Financial Corp. for more than $25 billion to gain about 280 branches in 10 states, said three people with knowledge of the talks.
A deal for Oakland, California-based Golden West may be announced as early as tomorrow, said the people, who declined to be identified before an agreement is reached. Wachovia spokeswoman Mary Eshet declined to comment. Golden West's William Nunan didn't return calls.
The purchase would be the biggest ever for Wachovia, which has quadrupled its profit since the end of 2001 in part by taking over companies such as Birmingham, Alabama-based SouthTrust Corp. Chief Executive Officer Kennedy Thompson has shifted his focus in recent months to California, home to an economy bigger than Canada's and the nation's ninth-fastest growing population.
``Wachovia has its eyes on competing with Bank of America and Citigroup, and there aren't many franchises available with the scale of Golden West,'' said Sunil Reddy, who helps oversee $2 billion at Fifth Third Asset Management in Cincinnati, including Wachovia shares. ``They needed to expand in California.''
Golden West owns World Savings Bank, the nation's second- largest thrift, and Atlas Funds, a manager of $2 billion in mutual funds and annuities. It had almost $125 billion in assets and 10,495 full-time employees as of Dec. 31.
Sixth in California
Wachovia has about $542 billion in assets, compared with almost $1.6 trillion for New York-based Citigroup Inc., the No. 1 U.S. bank.
Golden West ranks as California's sixth-biggest bank with more than $27 billion in deposits in the state, according to research by Banc of America Securities. Wachovia gained a retail-banking foothold in California on March 1, when it added 19 branches in the purchase of Westcorp for almost $4 billion.
The Charlotte, North Carolina-based bank in December bought AmNet Mortgage Inc., a San Diego-based lender with a nationwide network of 7,000 mortgage brokers.
Thompson, 55, has won a following among shareholders by shunning acquisitions that wouldn't generate a 15 percent return on the investment and add to Wachovia's earnings per share within two years. In June, he passed on an opportunity to buy MBNA Corp., then the biggest independent credit card issuer, because it didn't meet those criteria.
Adjustable Rate Mortgages
Golden West ``might be a little expensive for Wachovia, but it's a good fundamental strategic deal for them,'' said David Hendler, a New York-based analyst at CreditSights Inc., which has an ``overweight'' rating on Wachovia's bonds. ``It gets them California and it gets them these adjustable rate mortgages, which are attractive.''
Almost all of Golden West's loans are adjustable-rate mortgages on residential properties, most of which carry an interest rate that changes monthly, according to the company's annual 10-K filing with the Securities and Exchange Commission. More than $72 billion of Golden West's $114 billion in loans receivable as of Dec. 31 were in California. Golden West originated $34.5 billion of its $51.5 billion in new loans last year in the state, according to the filing.
A sale of Golden West would be a windfall for Herbert and Marion Sandler, septuagenarians who share the chairman and CEO titles. The couple, which founded Golden West in 1963 and took it public five years later, own shares and options representing 10 percent of the company. That stake would be worth more than $2.5 billion in a takeover.
Herbert is 74 and Marion is 75. Marion's brother Bernard Osher, who also sits on the company's board, holds a 3.7 percent stake, according to a March SEC filing.
Stock Penalty
Thompson, seeking to avoid any negative pressure on Wachovia's stock, has shied away from discussing acquisitions in recent months, choosing only to reiterate his criteria.
``Our stock has been penalized by the fact that we talk about it more than we actually do it,'' Thompson said on a July 19 conference call.
Other lenders, spurred by increasing competition and higher borrowing costs, have already acted. Bank of America Corp., the No. 2 U.S. bank, purchased MBNA on Jan. 1 for $34.2 billion. Capital One Financial Corp., the biggest issuer of Visa and MasterCard credit cards, agreed in March to buy North Fork Bancorp for $14.6 billion.
``Banking is becoming more and more of a scale business,'' Fifth Third's Reddy said. ``Banks are revenue-challenged, competition is intense for deposits and their margins are being pressured by the flattening of the yield curve.''
Interest Rate Impact
Wachovia reported its slowest earnings growth in five years in the first quarter, even as its average loans rose 18 percent. Fifteen straight increases in short-term interest rates by the Federal Reserve caused the bank's net interest margin -- the difference between what it earns on loans and pays on deposits --to shrink to 3.21 percent from 3.31 percent.
Bank stocks got a boost late last month after Fed Chairman Ben Bernanke indicated that the central bank may keep interest rates stable.
Wachovia shares hit an all-time high of $59.85 on April 28, the day after Bernanke's comments. The shares have gained 12 percent this year, compared with the 9 percent climb in the 24-member Philadelphia KBW Bank Index. They rose $1.01 to $59.39 on May 5.
Golden West shares, which have almost doubled in the past three years, gained 6.8 percent since Dec. 31. The stock rose $1.82 to $70.51 on May 5.
`Still a Thrift'
Richard Bove, an analyst at Punk Ziegel & Co. in Pinellas Park, Florida, said Wachovia's stock will be ``knocked substantially lower'' if the agreement to buy Golden West goes through.
``It's a trophy franchise and people have wanted to buy it for years,'' Bove said. ``But it's still a thrift. They have the wrong customer base. They pay too much for funding relative to commercial banks and their portfolio is made up almost entirely of mortgages at a time when the housing market is slowing.''
