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Some large banking companies have responded to rising delinquencies and falling home values by freezing or reducing borrowers' home equity lines of credit, but TriCo Bancshares Inc. is reluctant to do so.
August 22
Crisis lesson No. 1: Don't wait to hold your company's first-ever conference call with investors until a few days after your stock plummeted.
TFS Financial Corp. in Cleveland learned that the hard way Monday in a hastily arranged call to discuss an escalating regulatory problem. The reception was hostile — and probably avoidable.
Before executives at other companies roll their eyes, they should consider lesson No. 2: In the current climate, crises can strike the most unsuspecting targets. TFS made a profit last quarter and had a strong reputation, but these advantages did not prevent regulators from raising concerns about concentration risks in an otherwise healthy home equity portfolio.
Linda Margolin, the president of Margolin & Associates, an investor relations firm in Cleveland, said TFS executives seemed to have the best of intentions but either were not prepared with answers — or did not have enough yet — to satisfy investors and analysts on Monday.
"This kerfuffle is way out of proportion to the magnitude of the crime. Unfortunately, they did nothing but fan the flames with their conference call," Margolin said. "Investor relations has moved up a couple notches in importance — currently for damage control and, in the future, for better communication of their business plan and execution."
The $10.9 billion-asset company flew into crisis mode after its stock lost roughly one-fifth of its value Thursday on the news that it was suspending its cash dividend because of the regulatory scrutiny.
Monday afternoon, executives played host to a conference call to shed light on its dealings with the Office of Thrift Supervision. "This meeting today may be a little clunky compared to what some of you are used to, since this is our first investor call of this kind … ," said Marc Stefanski, the chairman and chief executive, candidly opening the call. We "are hopeful that we can eliminate or calm the fears of some of you and clarify to you as our partners to the best of our ability the issues at hand."
Analysts and investors said TFS' call was a nice gesture but did too little to clarify a confusing situation.
"They are one of the largest publicly traded mutual holding companies. Their stock dropped more than $2 in one day. They were correct to show a sense of concern," said Joseph Stieven, the president and founder of Stieven Capital Advisors LP in St. Louis, who participated in the call. "But I feel like it left a lot of investors scratching their heads."
Beyond the company's handling of the situation, Stieven said, investors and analysts are equally, if not more, confused by the OTS' action.
Calls to the company were not returned, and the OTS declined to comment.
At issue is the company's exposure to home equity lines of credit. At June 30, the end of the company's third quarter, such loans totaled $2.9 billion, about 26% of its total assets. With unfunded commitments, home equity's share swells to about half its assets. The company said its concentration has been roughly the same for a decade.
It is a portfolio that has performed well, too, analysts said, as has the rest of the company. At June 30, nonperforming loans made up 3.27% of total loans. The company was profitable, reporting earnings of $10.2 million, roughly flat with year-earlier results.
Home equity lines were viewed with watchful eyes in the early part of the economic cycle, said Matthew Anderson, a managing director at Foresight Analytics, but have largely remained stable, with a delinquency rate teetering around 3% for the industry in the last seven quarters.
Ample capital backs TFS' portfolio, many observers say. At June 30, the company's total risk-based capital ratio was 19.45%.
"The delinquencies, combined with their capital, show us that they have a handle on this," said Daniel Arnold, an analyst at Sandler O'Neill & Partners LP.
Still, it was not enough to satisfy the OTS.
The company said Monday it is negotiating a memorandum of understanding with the OTS about the risk concentration and the company's ability to work through problem home equity loans. In the meantime, the company must get permission 45 days in advance before repurchasing stock or paying cash dividends. It said it would do neither until resolving matters with the regulator.
The company has suspended all new home equity lines of credit, tried to convert others into other types of loans and said it plans to ask borrowers with unfunded commitments to cut their lines.
The company's unwillingness, or perhaps inability, to give details of how it plans to unwind the regulatory tangle was a major point of contention with agitated investors during the call.
Repeatedly, investors with ideas ranging taking the rest of the company public to diversifying assets were met with a similar response: The company is in a holding pattern until the results of a third-party review are completed and submitted to the OTS.
Perhaps that is lesson No. 3: "Never hold a conference call when you don't have all the answers," Margolin said.
