Partial Conversions on Your Investment and Stock Strategy
Sunday, January 29th, 2012Our debate so far on bank conversions has focused on banks that do a full conversion and sell 100% of the available shares to depositors. There is a second type of conversion known commonly as a ‘partial conversion’. Some mutual banks form what is sometimes known as a ‘Mutual Holding Company’. Banks with a mutual holding company structure own the great majority of shares (bigger than 50%) of stock in the subsidiary bank. When a Mutual Holding Company converts to stock ownership it sells a minority (less than 50%) of the available shares to its depositors in a partial conversion. Minority shares that are sold to depositors are publicly traded on the NYSE or NDX stock exchanges.
As an example, TFS Financial Company operates as the holding company for Third Fed. Savings Bank. The TFS Money holding company retains 74% of the major shares of Financiers Savings Bank. 3rd Fed Savings Bank conducted a partial conversion and sold 26% of the exceptional shares to depositors of Third Fed Savings Bank. The shares are traded on the NDX under the symbol TFSL. I had a high-interest account at 3rd Fed. Savings Bank and was able to purchase shares in the partial conversion.
The latest trend in conversions suggests that the Mutual Holding Company structure is beginning to become more popular and now accounts for the majority of conversions.
The Net Worth of the Bank Can Double Overnite
Speculators Bancorp is still a Mutual Holding Company (“MHC”). Many MHCs decide at later to sell the shares held within the holding company in what is referred to as a ’second stage offering’. In a second stage offering the majority of the shares held in the MHC are sold to depositors in a ’second step ‘ IPO.
When this happens the current minority shareholders nearly always receive an important price appreciation in the cost of the minority stock. This price appreciation happens as a consequence of the increase in the net worth of the bank that may double or even treble on the day a second stage offering is completed. The net worth increases as the cash received from the sale of the majority shares is added to the bank’s treasury.
MHC second stage offerings are not the same type of offerings that result when a public company permits an increase in the number of its major shares and then completes a secondary offering in which additional shares of stock are sold. This leads to a dilution of shareholder’s equity. The MHC second stage offerings are accretive to shareholder equity as cash is received for the sale of the majority stocks in the second step IPO but the total number of exceptional shares isn't increased.
In a MHC second stage offering minority shareholders normally receive two to four shares of the new stock issue for each minority share owned so as to maintain their original proportion of ownership. ‘Second stage ‘ offerings increase the capital base of the bank which permits the bank to extend its loan portfolio which in turn can increase the revenues potential of the bank
90% Return with Low risk
For example, in my son Ryan’s education account, I purchased 500 shares of Bank Mutual Establishment the Mutual Holding Company for Mutual Savings Bank at $23.50 per share for a total investment of $11,750 (see brokerage confirmation that follows).
Bank Mutual MHC subsequently conducted a second stage offering and sold the majority shares held by the holding company to depositors at the bank. As minority shareholders, we were given 3.668 shares of the new Bank Mutual stock for each minority share we owned so now we own 1,834 shares of Bank Mutual. The present cost of Bank Mutual is 12.20. Our 1,834 shares are now worth $22,374 which interprets to a $10,624 profit and a 90% return.
The 90% return demonstrates the potent profitability of making an investment in the minority stock of Mutual Holding Company and the proceeds from selling this stock may even cover one year of university costs for Ryan!