Chicago Thrifts Luring Investors With Initial Public Stock Offerings

Initial public stock offerings by depositor-owned thrifts have surged in Chicago, attracting investors nationwide in search of big gains.

In the past three weeks four thrifts have announced plans to issue stock, and more announcements are expected. Thrift executives said a desire to participate in the banking industry's current merger wave is fueling the activity.

More Deals Expected

"I think you'll see a rash more of these coming down the road," said Thomas McCabe, senior vice president and treasurer of NS Bancorp, a $1.3 billion-asset thrift that issued 10 million shares last Dec. 19.

With assets of $1.8 billion, Bell Federal Savings Bank is the largest of the thrifts to recently announce plans to go public. The others are Liberty Federal Savings Bank, Security Federal Savings and Loan, and Calumet Federal Savings Bank, each with less than $500 million in assets.

The trend has brought some skepticism along with attractive returns.

Many thrifts, particularly in New England, have failed or fallen on hard times after using capital from initial public offerings to make risky condominium and office building loans.

Squandering Feared

Experts question whether newly converted thrifts will avoid squandering their new capital on bad loans as other thrifts have done in the past.

"It's a very interesting question [as to whether they will be able to control themselves]," said Bruce Harting, an analyst at Salomon Brothers Inc.

The pace of thrift conversions is up nationwide. Experts say Chicago is likely to remain the epicenter because roughly 150 of Illinois' 250 depositor owned thrifts are based there. This concentration is a throwback to the days when branch banking was forbidden in the state, and each Chicago neighborhood had its own ethnic roots and its own thrift.

A rising stock market for bank and thrift issues and successful offerings by Cragin Financial Corp. on June 6 and NS Bancorp sparked the current round of conversions in Chicago, experts said.

Up from Offering Price

Cragin's stock has risen to $21.125 from its offering price of $10 a share, and NS Bancorp's stock has risen to $17.375 from its offering price of $8 a share.

But beyond that, experts say there is a sense among the management of these banks that they can't be players in banking consolidation if they remain depositor owned.

"You need to be a stockholder-owned company to acquire other institutions," said Donald Holton, Cragin's chief marketing officer.

Reid Nagle, president of SNL Securities, said thrift public offerings have an additional appeal to thrift managers in that they can become wealthy overnight. "They typically buy lots of the offering and get options. If the stock trades up, they can sometimes make 10 times their salary in stock appreciation," he said.

Trend Has Been Spotted

Most thrifts that are converting to stock ownership don't need the fresh capital just to keep operating. Cragin, for example, had an equity-to-assets ratio of 6.6% before it issued stock. The ratio now stands at near 11%, according to Fredric Novy, chief operating officer.

Thrift executives say out-of-state depositors have already spotted the trend and have begun opening accounts at thrifts they think will go public.

In thrift conversions, depositors get the first opportunity to buy shares. If the offering is popular, outsiders never gets to buy any until it is trading in the secondary market.

Mr. Novy said that when Cragin issued 10.5 million shares on June 6, about 50 investors from out of state had accounts solely as a way to buy stock.

Discount to Book Value

Thrift IPOs are appealing because the stock is often issued at substantial discounts to book value, even though the company is healthy. That means the potential for appreciation is substantial. For example, Cragin and NS Bancorp both issued stock at roughly 45% of book value.

This strategy runs contrary to that of most stock offerings, in which the issuer strives to issue at the highest possible price to raise the most amount of money. However, in thrift IPOs the flexibility of being stockholder owned, not capital, is the biggest concern. Executives as a result err on the side of lower prices to be sure the deal is completed.

Executives say thrift conversions are starting only now in Chicago because until recently it was too difficult. Mr. Novy said most of the thrifts in Chicago are federally chartered and until passage of the thrift law, it was difficult to get approval. He said the reason so many thrifts converted in New England in the 1980s was because most were state chartered. That was an easier process.

Question of Control

Also, there was the issue of control, said Mr. McCabe of NS Bancorp. A lot of thrift executives didn't need the capital and didn't want to risk having an unfriendly investor control a big block of stock. Now, he said, management and employee stock ownership plans can control up to 11% of a company's stock.

Both Cragin and NS Bancorp executives say they plan no major changes in their lending strategies, even though their offerings have ballooned their equity to asset ratios to 11% and 16% respectively.

Mr. Novy said growth in mortgage demand is growing fast enough to accommodate their desire to invest their additional cash slowly. Furthermore, Mr. Holton said the additional capital will be helpful in making acquisitions.

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