OTS Tackles Huge Profits From Initial Stock Sales

Regulators are cracking down on what they see as windfall profits from initial public offerings by savings and loans.

The Office of Thrift Supervision has rejected applications by two mutually owned companies that hope to go public, saying the initial valuation of their net worth was too low.

The two mutuals, Equality Bancorp in St. Louis and Staten Island Bancorp in New York City, were required to delay their offerings pending higher valuations. Equality Bancorp stock is expected to trade by next week,a six- week delay, while officials at Staten Island are unsure when their stock will trade.

The regulatory action is the latest and strongest step in a two-year campaign to make sure the value of institutions going public is not unfairly distributed to a few well-positioned investors. When the valuation is too low, the first people to buy shares can receive huge profits when the stock jumps.

Some analysts complained that in their zeal to curb profiteering, the regulators could hurt the financial institutions they are supposed to protect.

Higher valuations will burden the mutuals with excess capital which they cannot easily deploy, the analysts said. They noted that regulators have restricted buyback activity and special dividends for such institutions- leaving institutions struggling to boost their return on equity.

The institutions "won't be able to compete," said one observer who declined to be identified. "The only way to get rid of the excess capital is through acquisitions which many of these companies are unskilled at doing."

Kip A. Weissman, an attorney with Silver Freedman & Taff in Washington, said that higher valuations put "additional earnings pressure on a converting institution since there are more shareholder mouths to feed."

Mr. Weissman said the days of low valuations are over.

"Any high-profile deal is going to be under significant appraisal pressure in today's environment and if the subscriptions are too strong, the regulators may consider requiring a resolicitation. It is that simple," he said.

Officials at the OTS and the Federal Deposit Insurance Corp. were unavailable for comment.

Initial public offerings by GreenPoint Financial Corp. in New York and Security Savings in Milwaukee, in which shares jumped sharply in the first hours of trading, attracted the attention of regulators a few years ago.

At the time, the OTS held a meeting with the country's largest appraisers urging them to value such companies at higher levels. A similar meeting was held this month, said a source who declined to be identified.

The source said regulators' rhetoric was hotter in the earlier meeting, but this time, their actions spoke louder than words: The Staten Island Bancorp application was rejected shortly afterward.

Leonard O. Wolter, vice president of Equality Bancorp, said the process of reappraising and then resoliciting investors is inconvenient and expensive for both institution and investors.

And while Equality was resoliciting, it was unable to release the funds of investors, making many "very upset," said Mr. Wolter. "The OTS thought they were helping the public, but in this case they were making it very inconvenient."

The regulators' biggest concern is that huge pops in the share price of mutual conversions are artificial.

Their efforts to control the offerings may be in vain, several observers said. "Logically, companies that have higher valuations should have smaller pops," said Mr. Weissman. "However, that may not happen. With all the uncertainty in the market, mutual conversions look like the last sure thing. There is a lot of money looking for investments and where do you put your money?"

Ben A. Plotkin, president of Ryan Beck and Co., Livingston, N.J., agreed. "This will not hurt investors," he said. "While a resolicitation is unusual it is not unprecedented. And it is doubtful that it will be harmful to the company. These are still priced at a discount and the bank stock market has been very strong."

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