Independence IPO Set to Ride Thrift Wave

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By Erle Norton
Staff Reporter

When

Independence Community Bank

goes public later this year, forget about the fact that the Brooklyn, N.Y.-based savings bank considers its community -- not shareholders -- its top priority. Forget about its low pricing policy, which restricts revenue growth. And forget about its roller-coaster earnings.

Forget about all this and you most likely will make money, because lately thrift IPOs soar almost without reason.

In the second quarter, newly issued thrift stocks climbed an average of 30% from their offering price on their first trading day, according to

SNL Securities

, a Richmond, Va.-based financial research firm. That percentage jump was off only slightly from the first quarter's 33% average. The first-day run-ups usually are followed by further increases.

"There's a lot of euphoria," says Chris Smith, SNL's conversion research editor. "Unless something happens in the broader market to cool things off I think

Independence will definitely be well received."

"They've turned it into a no-brainer," says David Ellison, who manages the

FBR Financial Services

fund

, of thrift IPO investing.

Chalk up the euphoria to rampant takeover speculation as industry consolidation continues. Investors are even betting on takeovers three to five years down the road, says James Schutz, an analyst with

ABN AMRO Chicago

, which isn't involved in the Independence deal. Why three to five years? Regulators frown on newly public thrifts selling out too soon.

Then there's a cascade effect. One successful offering leads investors to look for another and then another.

Independence's IPO most likely will get a boost, for instance, from the successful IPO of its neighbor, Roslyn, N.Y.-based

Roslyn Bancorp

(RSLN:Nasdaq). Since its mid-January IPO, Roslyn's shares have soared 125%. "Anybody who has a deposit

at Independence will be told about Roslyn," says Ellison.

Independence plans an offering later this year -- most likely in the fall -- of $10 a share, or $581 million, making it the second-biggest thrift conversion ever, according to SNL. The biggest conversion to publicly traded from mutually owned was the 1994 IPO of

GreenPoint Financial

(GPT)

, which sold $804 million in stock.

But investors may have a tough time getting in, at least initially. As a mutually owned institution Independence must give its depositors first shot at buying shares, and depositors most often snap up all the shares offered and clamor for more. At Roslyn, there were offers to buy some $2 billion in stock, though Roslyn was selling just $423.7 million.

"I don't think Independence will be oversubscribed on that scale, but it certainly will be oversubscribed," says Smith at SNL.

Ellison says the initial roadblock gives other investors a chance to sit back and analyze the stocks. With Independence, investors will find a financial institution with a boring loan portfolio focused on a working-class clientele. And that's something for which Charles Hamm, Independence's chief executive, makes no apologies.

"Maximizing shareholder value is not our No. 1 priority," says Hamm. "We respect shareholders, but we have a high degree of respect for others, who are depositors, who live in our community. We're not interested in people from California looking for a flip. You buy our stock because you want to help support the community through our bank."

Independence serves "middle-income households and to a lesser degree, low- to moderate-income households," according to its prospectus filed with the

Securities and Exchange Commission

, which means that it "historically been a low service fee provider of a variety of savings and checking account products." Translation: slow revenue growth.

Earnings have bounced up and down. They fell more than 50% in the year ended March 31 to $17.2 million from $35.9 million in fiscal 1996. Even excluding a charge, the fiscal 1997 earnings were still lower after rising 3% in fiscal 1996 from the year ended March 31, 1995.

While most thrifts are angling to look like the more profitable banks, Independence sticks with the more traditional residential lending. Loans for multifamily housing units totaled $1.37 billion or 53.7% of the total loan portfolio at March 31. Single-family residential mortgage loans totaled $552.7 million, or 21.8% of the total portfolio, at March 31.

A key reason for the offering is that it would give Independence stock to use as currency in acquisitions, signaling possible growth. But Hamm notes that there are few targets in the New York City area and Independence has no intention of moving beyond the area. So don't expect a swift rash of M&A action.

With all of these facts, Hamm says Independence's IPO shouldn't get the level of attention of Roslyn's. "Clearly if our stock is as oversubscribed, it's insane," he says. "It has no rational justification whatsoever."

Perhaps not, but in a takeover-driven bull market, reason doesn't always prevail.