Provident Savings Bank was set up in 1839. Provident is a rewarding bank and has accumulated over $300 million dollars in kept revenues since its founding. Provident is a mutual savings bank. Mutual savings banks are owned communally by their depositors. Provident’s earnings have been amassing for a number of years but cannot be accessed by the depositors. Prudent Bank made a decision to convert to stock possession and sell shares of stock in the bank to its depositors. The shareholders of the stock own all of the equity or net worth of the bank including the retained revenues that have been building up for many years.
Provident sold stock to its depositors at 65% of book value. Book value is worked out by subtracting the debt of the bank from the assets of the bank (including the retained earnings). Book price for many banks is mostly cash (retained revenues and the money received from the IPO). So that the depositors purchasing the Prudent stock in the IPO are largely purchasing the net worth of the bank for 65 cents on the greenback.
The IPO stock price was $10 per share. If the stock is coming out at 65% of book price then the book value is about 15.38 per share (15.38 x .65 = 10.00). If the stock trades up to book worth at 15.38 then there'll be a 53.8% return for depositors who acquired the stock at $10 (15.38 minus 10.00 cost = 5.38 gain divided by 10.00 cost = 53.8% return).
Provident Bank converted from a mutual bank to stock ownership and offered depositors of the bank to buy stocks in the conversion IPO at $10 per share. As a depositor at Prudent Bank, I received notice by mail of the upcoming conversion and a stock order form which allowed me to purchase stocks in the conversion at the expedient IPO cost of $10. I finished the stock order form and returned it to the bank together with a check to get the stock.
As a depositor at Prudent Bank, I was able to purchase 52,000 shares of Provident Bank at $10 per share. I received a stock certificate from the bank (see copy of stock certificate that follows). I deposited the 52,000 shares of Prudent Bank in my trading account.
On the IPO date shares of Prudent Bank started trading on the stock exchange. On the 1st day of trading, shares of Provident Bank closed at 15.85. Buying the shares at $10 produced a $5.85 profit per share on the IPO date (current price of $15.85 “price of $10 = profit of $5.85). I had 52,000 shares of Prudent Bank which produced a total open trade profit of $304,200 on the IPO date. Not bad for a day’s work!