Thrift companies looking to raise capital through public offerings are not generating much interest from investors these days.
No fewer than four such companies have canceled or postponed stock sales in the last month, after struggling to sell even the minimum shares required.
Market participants say "professional depositors" have been the deciding factor in whether deals get done. These depositors typically have accounts at many thrifts, so they can be eligible to buy shares if and when the thrifts go public, but lately the depositors have stayed on the sidelines.
One frequent conversion investor said he decided against participating in three offerings, because he believes that thrifts' growth prospects are dim, and that appraisal values for the converting thrifts are still too high. Another said he has passed on seven deals.
"They are the ones who have been essentially making or breaking these conversions," said Theodore P. Kovaleff, an analyst at Sky Capital LLC in New York.
Eric Luse, a partner at Luse Gorman Pomerenk & Schick PC in Washington, agreed with that assessment.
"Historically, they are very influential in all of these deals. They make it easy to sell these stocks in good times, but their lack of participation also makes it difficult in bad times," said Mr. Luse, whose law firm has advised many converting thrifts. "Your average mom-and-pop depositor is still averse to buying stock, and even when they do, they typically are not going to buy as much as the professionals, who often go right up to the maximum."
Professional depositors contacted for this article declined to be interviewed on the record, but they noted with irony that many thrifts try to weed out deposits like theirs, fearful that the depositors might become activist investors later. Now they say the thrifts could benefit from having more depositors who want to buy stock.
"It's called unintended consequences," one of the investors said. "They make it difficult to open accounts, and now they suffer for it."
A flurry of reappraisals has lowered valuations for converting thrifts of late, but investors just do not see thrift stocks as good buys right now.
"If people are not buying homes, they're not getting mortgages, and that affects the cash flow at all of these banks," the investor said. "Next year could be a worse year than this one. If there's not going to be a lot of growth, why invest?"
Because of weak investor demand, K-Fed Bancorp of Covina, Calif., and Atlantic Coast Federal Corp. of Waycross, Ga., have canceled second-step conversions in the last month.
BCSB Bankcorp Inc. of Baltimore said Dec. 3 that its second-step offering would be delayed until the first quarter, pending a reappraisal, and that it would return to subscribers any funds it has raised to date. The $645 million-asset BCSB had planned to sell up to 3 million shares, but it had received orders for less than 600,000 — even after extending the deadline by three weeks.
Perhaps no thrift company has been affected by the market downturn more than the $578 million-asset Bradford Bancorp Inc., also of Baltimore.
It had planned to use the proceeds from an initial public offering to acquire Patapsco Bancorp Inc. of Dundalk, Md., for $45.5 million in stock and cash. Like BCSB, Bradford failed to sell enough shares to proceed with its offering, and on Dec. 27 it said it would return whatever funds it has raised, with interest. It also said that the acquisition is on hold unless Patapsco agrees to a "significantly" lower price.
"Bradford would have been easily done a couple of years ago, because the money would have poured in, but today, the economic conditions being such, people are much more careful," said Mr. Kovaleff of Sky Capital.
Some industry insiders said demand for these stocks — historically viewed as can't-miss investments — is the weakest they have ever seen.
In his 25 years working on mutual-to-stock conversions, Thomas P. Duke, a principal at Sandler O'Neill & Partners LP, said he cannot remember any thrifts failing to get an offering done.
The last low point was around 2000, Mr. Duke said. "We had some deals that in good markets would have been oversubscribed that didn't get oversubscribed, but they did get done."
The appraisal values for the converting thrifts — which dictates how many shares they must sell — shrunk at that time, and the ratio of price to tangible book value on these stock sales hit some of their lowest levels. Essentially, that allowed investors to get more savings bank for the buck, making the deals more attractive.
The same dynamic is happening again. After prices for bank and thrift stocks plummeted this summer, the thrifts that had been planning to go public or do a second-step conversion downsized their offerings. The median ratio of price to tangible book also came down, particularly for the second-step deals.
In the first half of the year three of those transactions were completed, and they had a median ratio of 111.7%. In the second half the four completed through Dec. 14 had a median ratio of 84.4%, according to data provided by KBW Inc.'s Keefe, Bruyette & Woods Inc.
"The values have come down. Whether they need to come down further is a good question," Mr. Luse said.
The $1 billion-asset First Financial Northwest Inc. is among those that had its appraisal value lowered this summer to reflect the weaker market for financial stocks. The lower value reduced the number of shares it had to sell by about 9%.
The South Renton, Wash., company ultimately raised $211 million in October. Because depositors oversubscribed the deal, it closed at the top end of the valuation range, which is called the "supermaximum."
Victor Karpiak, the chairman, president, and chief executive of First Financial Northwest, said he believes "professional depositors" helped ensure such a strong IPO in a weak market.
"I do recognize that a lot of our purchases were from the East Coast, so a lot of them were likely the professional-investor types," he said. "There were big blocks where investors were buying whatever the maximum would bear."
The IPO also benefited from the company's historically strong asset quality and its location in the Pacific Northwest, which had not experienced much economic deterioration by October, Mr. Karpiak said. "The housing market was still strong, and property values were still appreciating here at the time. But now we're starting to feel the pinch."
The plush debut stands in contrast to that of other thrifts. Several recently completed deals barely sold the minimum, even after extending their offerings beyond depositors, first to local residents and then to the general public.
Mr. Luse said standard conversions and first-step offerings often do well even in a weak market.
The second-step offerings are the most difficult to get done, because there is less flexibility with pricing, since there are existing shareholders to keep happy, he said.
Mr. Duke attributes the weak demand as much to reticence on the part of regular depositors as the professionals.
"I think the general public is reading a lot about the subprime mess and the decline in housing values," he said. "All of those things are causing people to look very carefully at any investment in financial institution stocks."
Still, despite all the uncertain climate, deal volume is up this year. As of mid-December, 25 conversions had been completed, versus 18 in all of last year. But the pipeline is thinning. During the second half only a handful of thrifts announced plans to convert.
Gateway Community Financial Corp. of Sewell, N.J., was one of the first thrift companies to postpone its IPO. It did so in August.
"It was not the easiest decision, because not many institutions begin this process, get to that starting line, and put the skids on," said Robert C. Ahrens, the president and CEO of Gateway and its $372 million-asset Gloucester County Federal Savings Bank. "It's something you haven't seen for the last 20 years or so."
Gateway had been planning to do a first step conversion and sell 45% of its stock to the public. Mr. Ahrens said he is not abandoning hope for conditions to improve next year. "We're going to keep our fingers crossed."
