Charter One Financial Inc. is gearing up to convert from a thrift to a national bank this month, but some are questioning whether the Cleveland company is ready for the switch.
The company, by most accounts, has made progress in shifting its mix of business, but in terms of its balance sheet, it “remains in essence a thrift,” according to Jonathan E. Gray of Sanford C. Bernstein & Co. LLC, a New York unit of Alliance Capital Management, who downgraded the stock to “market perform” from “outperform.”
The $38 billion-asset company’s charter conversion plan was approved by the Office of the Comptroller of the Currency in March and by the Federal Reserve Board last month. Ellen Batkie, Charter One’s head of investor relations, said it expects to complete the change this month.
To be sure, some analysts are prepared to give Charter One the benefit of the doubt for now.
Changes to balance-sheet assets and the higher loan-loss reserves are clearly signs that its transformation is going well, said Frank J. Barkocy, the director of research at Keefe Managers Inc.
Mr. Gray does have praise for the earnings potential at Charter One. In a research note issued Wednesday, he called it “a quality company with significant earnings power,” and wrote that he expects earnings per share to rise 12% this year. However, he also wrote that the company remains focused on the savings and loan business — over half the loans originated during the first quarter were single-family mortgages.
Residential mortgages and mortgage-backed securities make up 59% of the balance sheet, he wrote. The stock price has also hit Mr. Gray’s target of $35, he said.
Ms. Batkie said Charter One is determined to formalize the change in its business structure — a transformation that has been in the works for several years.
While banking companies can have a mix of mortgages, small-business loans, and big commercial credits on their balance sheet, the bulk of thrifts’ portfolios must be real estate-related. No more than 20% of their assets may be invested in business loans.
Ms. Batkie said the company’s goal is to shrink its single-family mortgage and mortgage-backed securities portfolio to 35% of total loans within the next three years, in part by selling assets and mature loans and by slowing down the pace of mortgage originations. The regional banking average is 39%.
During the first quarter Charter One shrunk its loan portfolio by 15% from a year earlier by selling $2.8 billion of loans, Mr. Gray said.
However, he called into question the company’s reserve levels and noted that its provision percentage — 1.04% of total loans, a 24-basis-point improvement from a year earlier — is low relative to its regional bank peers.
Ms. Batkie insists that the company is working on boosting its reserve-to-loan ratio to between 1.25% and 1.5% within the next 12 to 18 months. That would put it in line with its regional banking peers.
The charter conversion should help Charter One expand banking business lines, Mr. Barkocy said. It has beefed up its regional banking capabilities in recent years, especially in terms of cross-selling consumer products and commercial banking.
Charter One’s stock has had quite a runup recently. Since hitting a low in October, it has gained 43% and outperformed the Standard & Poor’s 500 index, of which it is a component, Mr. Gray said.
Mr. Barkocy agreed that the stock has gotten pricey and said he has sold shares to take profits recently. Still, he said that he is recommending the stock to investors and that it “should be in any portfolio.”
However, Scott Valentin, an analyst at Friedman, Billings, Ramsey & Co. Inc. of Arlington, Va., said Charter One still trades at a discount to the regional banking group, even though its efficiency ratio of 40.58 is well below many other companies in the group. His target price for the stock is $40.
On Wednesday, Charter One fell 0.37%, to close at $35.25.
