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SMALL BANKS LINING UP FOR IPOS, BUT THE STOCK OFTEN GOES DOWN

Can investors turn $231 million-asset MegaBank Financial Corp. into something big enough to call Average Bank? The Englewood,…

Can investors turn $231 million-asset MegaBank Financial Corp. into something big enough to call Average Bank?

The Englewood, Colo., company, which owns eight banks in the Denver area, was one of a 79 financial institutions to go public last year, according to IPO Monitor, a Calabasas, Calif., newsletter. Although bank IPOs raised a total of $3.7 billion, making money in one was a hit or miss proposition.

Sectorwide, the average stock price increase from the offering figure till yearend was 7.07%. That compares to an average 123 increase for the Icarus-like Internet issues and a 42.3% decline for the average biotechnology stock.

Contrast the fortunes of $152.75 million-asset PSB Bancorp in Philadelphia, which went public in July at $10 and saw the price jump 160% to $26, with those of Guaranty Bancshares Inc. Shares in the Mount Pleasant, Texas, thrift opened in May at $14.25, but dropped 37.3 % to $8.94 by yearend. MegaBank, by the way, opened in July at $10 and dropped 13.6% to $9.50.

“Banks are very much tied to economic conditions of regional markets,” says Joe Morford, senior research analyst at San Francisco-based Van Kasper & Co.

“The most important thing in investing in these companies is the individuals themselves running the organization.”

It seems strange that in a saturated banking environment, so many tiny financial institutions that few have heard of would go public and attract investor money. The largest bank to go public last year was $290.10 million-asset Brookline (Mass.) Bancorp. (Its stock jumped 15% to $11.05 after its offering in March.)

But these closely held banks still managed to raise on average $48.33 million — from savvy institutional investors with plenty of time for research as well as individuals in their home regions who buy into the community bank mission of personalized service based on relationships, instead of credit scoring models, 800-numbers and automation.

“Over the past several years, there has been tremendous consolidation,” Mr. Morford says.

“When big banks get bigger, service typically deteriorates. Experienced bankers start breaking away, starting up their own banks as they see voids in their marketplace.”

Larry A. Olsen, MegaBank’s president and chief operating officer, says the bank’s investors include money managers and individuals. He predicts continued growth opportunities for community banks, in part because retail and small business consumers will continue to demand personal service.

“Our differences are flexibility and quick turnaround,” he says. “We are able to make decisions quickly and don’t get bogged down. I think there will continue to be opportunity, because the local, independent banks are still in the relationship business.”

And, adds Mr. Morford, because community banks typically start small — $50 million in assets — they can experience dramatic growth without competing for business with the bigger banks.

“The crumbs from big banks can go a long way for community banks,” the analyst says.

A $2 million loan can be insignificant for a bank with billions in assets, but it can be meaningful for one with less than $100 million in assets.

The sector’s IPO activity is likely to continue at a brisk pace through the first half of this year, says Gail Bronson, a senior analyst for IPO Monitor. But as the days to 2000 dwindle down, she predicts, worries about Y2K computer problems will cause investors in small-bank IPOs to take a break.

“The millennium issues are in the air, nevertheless, even if they are fantasy,” she says. “And that may affect the economy, and an automated industry like banking.”

Middle of the Road

Bank initial public offerings didn’t soar in ’98 like, say, Internet stocks.

Industry IPOs Avg. raised ($mil) Total raised % gain

Internet services 28 $48.77 $1,317.0 123.1

Computer, commun. products 34 62.76 2,133.9 61.6

Technology 109 53.85 5,762.7 41.7

Computer, commun. services 73 50.15 3,560.9 21.3

Business services 22 67.42 1,415.9 11.3

Retail 16 53.08 849.3 10.1

Banking 79 48.33 3,673.69 7.07

Consumer services 34 183.83 6,066.5 -2.8

Consumer products 16 227.97 3,191.6 -5.8