Finance subsidiaries in the thrift industry

Finance subsidiaries have existed in other industries for a number of years but are relatively new in the savings and loan (S&L) industry. The subsidiary can access capital markets by selling Dutch auction rate preferred stock (DARPS) at rates more favorable than the parent can obtain. The IRS p...

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Bibliographic Details
Published in:The Mid-Atlantic journal of business 1992-12, Vol.28 (3), p.235
Main Authors: Page, Daniel E, Kroncke, Charles O
Format: Article
Language:English
Subjects:
Advantages
Capital markets
Capital requirements
Captive finance
Collateralized mortgage obligations
Credit ratings
Dividends
Equity financing
Finance companies
Financial institutions
Fixed rates
Home loans
Housing starts
Interest rates
Investments
Management
Mortgage companies
Preferred stock
Savings & loan associations
Savings and loan associations
Subsidiaries
Subsidiary corporations
Tax rates
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Summary:Finance subsidiaries have existed in other industries for a number of years but are relatively new in the savings and loan (S&L) industry. The subsidiary can access capital markets by selling Dutch auction rate preferred stock (DARPS) at rates more favorable than the parent can obtain. The IRS permits a subsidiary and its parent to consolidate income if the parent owns at least 80% of the stock of the subsidiary. As a result, an S&L that has carryover losses can structure a finance subsidiary that will allow for income consolidation. Issuing DARPS in these circumstances will allow the S&L to earn income from the money raised by the subsidiary without paying taxes on it. A case study is presented of Pathway Financial, a federally insured mutual S&L located in Chicago, that had substantial operating loss carryovers. To reduce its interest rate risk and to control its credit risk, Pathway formed a finance subsidiary, Pathway Capital Corp., that would issue adjustable rate preferred stock. The S&L has been very successful in raising capital at low rates.
ISSN:0732-9334