WASHINGTON -- The Office of Thrift Supervision last week put appraisers on notice that they will be penalized if stock prices of savings and loans rise too high after initial public offerings, sources said.

The agency summoned about a dozen of the leading appraisers to an 11 a.m. meeting last Thursday with a handful of its officials. For more than an hour, the OTS officials "read the riot act" to appraisers, according to one source who attended.

The meeting was "brutal," said Trent R. Feldman, managing director of Kaplan Associates Inc., an appraisal firm.

Other appraisers "were surprised at the very strong reaction that was expressed by the OTS," he said. They "were told that if their stock continued to exhibit very strong market performance, they would likely not be able to submit appraisals to the OTS in the future."

The OTS acted out of concern that unrealistically low valuations are responsible for the steep rise in stock prices that often occur after mutual thrifts convert to stock ownership.

On average, the price of thrift conversion stock has increased 28% in the first week of trading in the 130 deals since 1991, according to SNL Securities, a Charlottesville, Va.-based bank research and publishing firm. Non-thrift IPOs typically have a 15% price run-up.

Regulatory Effort, Too

Earlier this month, new OTS rules aimed at curbing insider abuse in mutual conversions took effect. The rules also tightened appraisal requirements.

Since then, both the OTS and the Federal Deposit Insurance Corp. have increased pressure on institutions to tighten appraisals by rejecting some deals over concerns that their appraisals were too low.

The OTS told appraisers last week that they will no longer negotiate on what the value of institutions should be, sources familiar with the meeting said.

In the past, if the OTS thought an appraisal was too low, it would require a higher one.

But in the meeting, the OTS said it would follow a different practice: It would turn the whole deal down if its appraisal was out of line, which would add tens of thousands of dollars to a thrift's cost of converting.

If the agency allowed the deal to go forward and the stock price soon shot up, appraisers would be called on to explain what accounted for the increase. The OTS would decertify them as appraisers if the explanation were not adequate.

Sources said appraisers were worried after the meeting because stock prices can increase when appraisals are fair because price is determined by investors.

"The market is still so irrational at the moment in favor of conversion stock that it would seem to be hard to avoid a conversion pop even when it's not really warranted," said Kip A. Weissman, a partner at the Washington-based law firm Silver, Freedman & Taft.

"You don't want to kill the goose that laid the golden egg," by making it more difficult for institutions to raise capital, Mr. Weissman said.

An OTS spokesman refused to confirm what was said in the meeting - or to admit that it occurred.

But sources say the OTS officials also told appraisers they were especially concerned about the valuation of conversions in which minority stakes in the thrift are sold while the majority is owned by a depositor-owned holding company.

The agency said management can more easily manipulate the stock price in these mutual holding company deals by changing the stock's dividend rate, and it decried the run-ups in stock price it has seen in those deals.

When appraisers asked the OTS how much of a run-up was too much, the agency refused to be pinned down, said one source. However, the understanding was that the OTS thought a 30% increase was far too high.

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