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April 24, 2007 > Bank with mantra of love going public

Bank with mantra of love going public

By Teresa Dixon Murray

CLEVELAND (AP), Apr 20 _ Third Federal Savings & Loan has a mission statement that preaches ``love'' and ``fun.''

Its chief executive plays in a rock band.

It offers low mortgage rates and high savings-account rates just to help people, even though the practice reduces its profit.

It doesn't currently employ a full-time attorney.

And the company celebrated its 65th anniversary a few years ago by giving every employee an extra week of vacation.

That doesn't exactly sound like a company whose stock is about to go public.

But the folksy family business that sprouted nearly 70 years ago from a Slavic Village bar in Cleveland will hit Wall Street on Monday after blockbuster demand by depositors who tried to gobble up more stock than is available.

Will the transition to the cutthroat world of public companies change the aw-shucks atmosphere at Third Federal?

Almost certainly in some ways, several experts say. But how much remains to be seen.

Corporate-compliance expert Carol McNerney of SS&G Financial Services Inc. in Solon, who specializes in regulatory and financial reporting, found Third Federal's warm-and-fuzzy mission statement endearing.

The statement was in the company's February prospectus, and Chairman and Chief Executive Marc Stefanski rattled it off earlier this week with pride: ``It's love, trust, commitment to excellence, treating one another with respect and having fun.'' McNerney chuckled.

``I think they may want to add something to that,'' she said.

McNerney, who is in charge of SS&G's accounting and auditing department said, ``It's not sounding like the mantra of a public company.''

IPO consultant James Arkebauer of Venture Associates in Colorado said going public will mean big changes to Third Federal's upper management, but it doesn't necessarily mean a transformation for Third Federal's overall culture.

``You see that change more when it's an acquisition,'' Arkebauer said. ``The culture shouldn't change that much. I would hope not and I would think not.''

Stefanski said he takes pride in Third Federal's perpetual ranking by Forbes magazine as one of the 100 best places to work. Among the nearly 1,000 employees, the average tenure is 10 years. Fifty-three have at least 25 years of service.

Stefanski, 52, doesn't see the company's basic values changing. ``Absolutely not,'' he said. ``That's the heart and blood of the organization.''

Alex Dodd, CEO of M Squared Consulting Inc. in San Francisco, which works with companies on going public, said some change is inevitable by virtue of being publicly accountable.

Until now, Third Federal as a mutual thrift was owned in spirit by its roughly 309,000 depositors. Its finances were kept private, and if executives wanted to do something major, they did. If it worked, great. If not, oh well.

``There's always a little bit of adjustment when you're used to calling the shots and now you have other people who will be watching,'' Dodd said. ``You're going to get more scrutiny and more questions.''

Not only are public companies more accountable for their actions; they also must get used to disclosing what they're doing, said Craig Lynam, a partner with BKD LLP in Cincinnati, one of the nation's largest CPA and advisory firms.

Maybe it's a change in business practices, or a new executive, or a lawsuit, he said. ``A lot of private companies just aren't used to saying, 'We need to make a public announcement about this.'''

Dealing with public investors, regulators and financial analysts who will crawl through every semicolon of Third Federal's reports will create pressure and stress at the top, said Dodd of M Squared.

There are a lot of headaches, hours and dollars that will be devoted to complying with laws, especially the Sarbanes Oxley Act of 2002 that has caused nightmares for most public companies. The act, which requires greater corporate compliance with internal-controls rules, was a response to a wave of corporate scandals in recent years.

``The more junior employees will be affected indirectly. They will feel the pressure,'' Dodd said. Some changes will be intangible, but real. ``All of a sudden, when people go into work one day, it's different,'' he said.

What happens inside the organization isn't necessarily visible to customers.

But if Third Federal were pressured to improve profits by boosting mortgage rates or shaving rates paid on deposits, customers would notice. Third Federal reports a net interest margin _ the difference between the rates it pays on deposits and earns on loans _ of a slim 2.37 percentage points. Local banks such as National City, Lorain National, Key and FirstMerit report margins of 3.5 to 4 percentage points.

In addition, Third Federal reported an efficiency ratio of 64.39 percent for 2006, which means it cost the bank a little more than 64 cents to generate $1 in revenue. That's up from 54.5 percent the year before. Ratios in the 50s are good.

``The pressure, the expectation of public investors is that the value of their investment goes up every quarter or every year,'' said Dodd. ``There could be a considerable increase in the pressure to perform. Wall Street is about profit, profit, profit.''

Equity analyst Jaime Peters of Morningstar Inc. in Chicago agreed. ``Wall Street is always about the bottom line,'' she said. Public companies generally are pressured to increase profits and cut costs, but she said Third Federal might have a little easier time if it has fewer institutional investors than average or is largely owned by existing customers, as is often the case with smaller banks.

Economist LeRoy Brooks of John Carroll University in University Heights said Third Federal stock might start out as largely locally owned, but as it trades, the ownership will become more diverse.

Investors may want the bank to increase fees or mortgage rates. ``I could see that in time,'' Brooks said, adding that a bank going public ``is not necessarily good for customers in the long run.''

Lynam of BKD said that investors definitely want value but won't necessarily squawk about Third Federal's interest rates or costs. ``As long as the return is coming, they'll be happy.''

Third Federal disclosed in its prospectus that it guarantees that an applicant won't find a lower mortgage rate, or else it will pay the person $500.

Stefanski has no plans to change the bank's low-rate motto, but added: ``I can't say we'll never change. Never say never.''

Several experts noted that executives at public companies also have to deal with seeing their salaries and perks disclosed on the Internet and in the media. ``Everybody in the neighborhood is going to know what the officers make,'' Lynam said.

Stefanski, who last year earned a base salary of $900,000 and a bonus of $910,657, said the public disclosure ``is just one of those things. It's a tradeoff with what's best to do for the company.'' He added that he has talked with his family, who often play roles in the bank's radio ads, about the loss of some of the family's privacy.

Stefanski, who in 1988 took over the bank that his father founded, said he'll still consider the bank a family business.

Brooks noted that Third Federal will be more transparent to competitors as well as to shareholders, but said it can remain the proverbial family business. ``Lots of local companies _ Smucker's, Forest City _ are still family-operated. They can still be family-controlled.''

Peters said the transition may be a little easier for Third Federal than for most companies just because, as a federally insured bank, it's already used to scrutiny from regulators. Now, it will just have more.

SS&G's McNerney said the first year or two will be the toughest for Third Federal's transition. ``It's probably a larger task ... than management initially anticipated,'' she said, pointing out that things that are worthwhile aren't necessarily easy.

``It's kind of nice,'' she said, ``to see a family-run company hit the big time.''


Information from: The Plain Dealer,

AP-ES-04-20-07 1321EDT

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