As bank stocks helped the broader market roar to new heights, Wall Street turned a cold shoulder to the shares of a newcomer, Reliance Acceptance Group Inc.
The stock price of the Wheeling, Ill., subprime auto lender dropped 13% in the first 30 minutes of trading Thursday. And it closed at $14.75, off $2.50, or 14.5%, amid widespread pessimism about the subprime auto lending business.
Reliance Acceptance grew out of a disagreement between the Cole and Taylor families, which owned Cole Taylor Financial Group. The dispute was resolved by transferring the assets of the subprime auto business to the holding company, which was renamed Reliance Acceptance Group. The bank assets were transferred to Taylor Capital Group, which becomes a privately held banking company.
Reliance's price at day's end was less than half Cole Taylor Financial's 52-week high of $32. Much of the drop has occurred in recent weeks, reflecting fallout from accounting irregularities disclosed last month by Mercury Finance Co., a leading subprime auto lender, and the bankruptcy filing last week by another subprime lender, Jayhawk Acceptance Corp.
Analyst Reilly Tierney of Duff & Phelps Credit Ratings said that investors were overreacting to the recent news and "straining too hard to find the next Mercury." He has rated Reliance's subordinated debt BB-plus, one step below investment grade.
"It's just bad timing," Mr. Tierney said. "The fundamentals are sound, and value investors may want to buy this on weakness."
He also said Reliance has one of the industry's lowest account-to- employee ratios, meaning it monitors its loans more closely than others.
Investment banker Stuart Harvey of Minneapolis-based Piper Jaffray Inc., which took Cole Taylor Financial Group public in 1994, called Reliance "a very well capitalized company" that "could be one of the few nonprime auto players that has the wherewithal to purchase other subprime auto portfolios."
But skeptics worried about Reliance's annualized 5.4% chargeoff rate during the last nine months, which has depleted its reserves.
And in a generally favorable report on Reliance, analyst William McGinnis of Robert W. Baird & Co., Milwaukee, said bad news could be in the offing, citing his expectation that the company might build reserves.
"Our best guess is that the company will report a loss" for the fourth quarter "- possibly a large loss," Mr. McGinnis wrote. "This is because, with the new capital from the divestiture, the company has an excellent opportunity to build strong reserves."
After that, he said, Reliance "is well positioned to take advantage of the recent industry disruption."