Capital: Investors Find Bargains in Thrifts Going Public

Issuing stock at steep discounts to book value is usually taboo, but it hasn't been for a handful of thrifts that went public recently.

In contrast with slowing demand for new bank stock issues, shares issued by a growing cadre of high-quality, depositor-owned thrifts are becoming more popular with investors.

Issuing prices relative to book value are at unheard-of lows, so investors can buy these issues cheaply. Furthermore, recent issues have appreciated substantially in price after the offering.

High Prices Usually Sought

"It is highly unlikely prices will go any lower for high-quality companies," Reid Nagle and Kevin Stiroh wrote in this month's market report for SNL Securities.

Normally, companies prefer to fetch as high a price for their stock as possible. Companies that are already public, including many large banks, don't want to dilute the holdings of current shareholders. And closely held companies usually want the highest price in order to boost capital.

It turns out that most thrifts are well capitalized before they go public. In these cases, the decision to issue shares often has little to do with maximizing issuing prices.

Many analysts, like Mr. Nagle, say the driving force behind these offerings is the desire of management "to become wealthy." This can be an incentive for a lower issuing price.

"They typically buy lots of the offering and get options. If the stock trades up, they can make sometimes 10 times their salary in stock appreciation," Mr. Nagle said.

Daniel Ruscitti, treasurer at Chicago-based Cragin Financial Corp., which issued shares earlier this month, said he could not comment on whether management's desire for wealth played a role in Cragin's offering.

Activity Peaked Before Crash

However, he said that going public would enable the bank to make employees, through stock ownership, feel like they had more of a stake in the company's future. Furthermore, he said, it would enable the bank to better compete for high-level executives by offering options.

The level of activity still doesn't approach the flurry of activity before the 1987 stock market crash. From 1985 to 1987, roughly 100 thrifts went public each year. Since the beginning of 1991, only 19 thrifts have gone public, according to Mr. Nagle, who recently did a study on the top 100 most attractive thrift IPO prospects.

Still, investor demand is growing as more realize the potential returns.

For example, Cragin, which has $2.5 billion in assets, went public at $10 a share earlier this month and is already trading at $14.625, a 46% appreciation.

NS Bancorp, Chicago, issued shares for $8.50 apiece on Dec. 20, 1990, and is now trading at $14.125, a 66% increase.

Growth of thrift IPOs is likely to be muted somewhat by the fact that some may not want to deal with the additional accountability required of public companies.

Specter of Bad Loans

Reckless lending practices in the 1980s by newly public thrifts flush with capital will also make investors edgy about these deals.

In New England, for example, a huge number converted in the 1980s but used the additional capital to expand too quickly into areas like commercial real estate, in which they had limited expertise.

Many, including four of the largest institutions in New Hampshire, have failed or are insolvent now. Mr. Nagle said he expects few public offerings out of New England institutions soon.

However, he said midwestern thrifts are probably worth looking at. Like the banks in that region, many thrifts avoided the excesses of the 1980s and remain healthy.

Although the most attractive prospect for an IPO is Charter Federal Savings in West Point, Ga., 37 out of the top 100 IPO prospects are from the Midwest, according to Mr. Nagle.

Based on an offering price of 35% of book value - the average issuing price these days - he said the implied return on an investment in a Charter IPO is 70%.

Top Prospects

Estimated return on investment should these thrifts go public for 35% of book value Assets Expected (in millions) gainCharter Federal $118 70.1%

West Point, Ga.

LaSalle Federal 100 67.5

Buchanan, Mich.

Citizens Federal 571 63.1

Hammond, Ind.

Illinois Service 102 56.8

Federal, Chicago

Sunrise Federal 415 56.8

Farmingdale, N.Y.

Source: SNL Securities

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