Sagging prices for community bank and thrift stocks have prompted several thrifts to rethink plans for their public offerings.
In the last week five thrifts either going public or doing second-step conversions downsized their offerings, and late Monday the $900 million-asset Atlantic Coast Federal Corp. in Waycross, Ga., said it would postpone its second-step offering "until market conditions are more stable."
The flurry of adjustments — which industry observers called highly unusual — illustrates just how far out of favor bank and thrift stocks have fallen. Investor concern over subprime mortgages, deteriorating credit quality, and shrinking margins is dragging the whole market down and conversions with it.
The $1 billion-asset First Financial Northwest Inc. in Renton, Wash., has reduced the number of shares it plans to sell by about 9%. Victor Karpiak, its chairman, president, and CEO, said the decision "was a result of where current market activity is for financial institutions. Everyone has taken a beating."
Still, investors that do get in on the offerings could benefit from the lower valuations. With converting companies selling fewer shares, the ratio of price to book value is lower, meaning there is more potential upside for investors, analysts said.
In fact, more mutuals might even decide to convert to stock form after seeing the lower valuations, said Mark Fitzgibbon, the director of research at Sandler O'Neill & Partners LP. The reason: Directors and management, who make the decision on whether the thrift goes public, tend to be among the largest investors in the offering.
"I actually think this pullback in conversion pricing will result in a lot more transactions coming to market late this year or early next year," Mr. Fitzgibbon said.
Conversion pricing tends to lag the market, and several analysts and bankers said these thrift companies are just getting their valuations in line with where their peers are trading.
The SNL thrift index was down 16.6% since June 1 and 20.4% for the year as of midday Tuesday.
And of the 17 thrifts that have held public offerings this year, the shares of 10 of those companies are trading below their initial offering price.
"You have a very tough market for community bank and thrift stocks, and specifically in the conversion space you have a couple of deals that have traded down from their offering prices or remained flat," said Matthew Kelley, an analyst at Sterne, Agee & Leach Inc. "So they're becoming more difficult to sell."
Robert J. Larison Jr., Atlantic Coast Federal's president and CEO, said in a news release Monday that his company would delay a second-step stock offering until next quarter or the first quarter next year. When it does proceed with the offering, it plans to issue 10% fewer shares than it had initially intended.
Besides First Financial, four other thrift companies filed with the Securities and Exchange Commission last week to reduce the number of shares they plan to sell on account of lower appraisals of their estimated value.
They are New North Penn Bancorp Inc. in Scranton, Pa.; Northfield Bancorp Inc. in Staten Island, N.Y.; LaPorte Bancorp Inc. in La Porte, Ind.; and Beacon Federal Bancorp Inc. in East Syracuse, N.Y.
"The volatility that we're seeing in the markets is causing investors to shy away from deals of any kind — even the traditionally highly successful thrift conversions," Mr. Fitzgibbon said.
Several market sources said Gateway Community Financial Corp. in Sewell, N.J., has also put its first-step offering on hold.
The parent of the $372 million-asset Gloucester County Federal Savings Bank has not formally announced a decision. Robert C. Ahrens, its president and CEO, could not be reached for comment late last week or early this week because he was on vacation.
Gateway had been planning to do a first-step conversion and sell 45% of its stock to the public.
The reduced appraisals can benefit standard and first-step conversions but are troublesome for those doing second steps, such as Atlantic, the analysts said. (A standard conversion takes a company fully public with one offering. In a first-step conversion, a company sells a minority of its stock and retains the rest in a mutual holding company. Often the rest of the stock is sold in a second-step offering years later.)
"If you were doing a second-step, you would want to bring it in at as high a valuation as possible," because of the existing shareholders, Mr. Fitzgibbon said.
But investors in the other types of conversions should be pleased about the lower valuations, the analysts said.
"For a longer-term investor, it's actually a more compelling opportunity to consider the space," Mr. Kelley said. "We believe longer-term outperformers are found in this side of the cycle, instead of the upside where you're chasing higher and higher valuations."
Valuations, though, are a moving target, so conditions could change substantially between the time a mutual decides to convert and it comes to market.
That is what Home Federal Bancorp Inc. in Nampa, Idaho, is counting on.
The $728 million-asset company is preparing to do a second-step offering. Daniel L. Stevens, its chairman, president, and CEO, said he hopes the market volatility passes by the time an appraisal is due.
"Our offering is still four or five months away," he said. "That's a lifetime in the market."
Three years ago Home Federal faced the opposite scenario. It planned to do a standard conversion in 2004 but decided to do only a first-step because of the high valuations at the time.
Mr. Stevens said that a standard conversion would have raised up to $130 million, far more capital than could be deployed efficiently by his company, which then had assets of about $400 million. So Home Federal sold about 40% of its stock instead and raised about $60 million.
Mr. Stevens said he is watching the market closely with the hope that the mortgage scare recedes. He said too many investors are dumping all stocks with mortgage exposure instead of sorting out which ones actually have subprime loans or poor asset quality.
"We don't have one subprime loan on our books and we have no asset quality issues at all. But we tend to get painted with the same broad brush, so it does affect our stock," he said. "We're anxious for the market to get that figured out."
Analysts and others familiar with the conversion market say the flurry of lower appraisals is unusual.
"Normally the market pushes values up," said Eric Luse, a partner at Luse Gorman Pomerenk & Schick PC, a Washington law firm that has advised many converting thrifts.
Conversion offerings are structured to allow for a range of shares to be sold, from a minimum to what is called a supermaximum. Mr. Luse said that range is built in to allow for changing market conditions. "So the market has to change quite a bit for us to have to literally update the appraisal."
