Our discourse so far on bank conversions has targeted on banks that do a full conversion and sell 100% of the available shares to depositors. There is a second sort of conversion commonly known 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 bulk of shares (greater than 50%) of stock in the subsidiary bank. When a Mutual Holding Company switches 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 Naz stock exchanges.
For instance, TFS Finance Corporation operates as the holding company for 3rd Fed Savings Bank. The TFS Finance holding company keeps 74% of the exceptional shares of Investors Savings Bank. Third Fed. Savings Bank conducted a partial conversion and sold 26% of the notable shares to depositors of 3rd Fed. Savings Bank. The shares are traded on the NAZ under the symbol TFSL. I had a savings account at Third Federal Savings Bank and was able to purchase stocks in the partial conversion.
The present trend in conversions means that the Mutual Holding Company structure is starting to become more and more popular and now accounts for the bulk of conversions.
The Net Worth of the Bank Can Double Overnight
Backers Bancorp is still a Mutual Holding Company (“MHC”). Many MHCs decide at later on to sell the shares held within the holding company in what is known as a ‘second stage offering’. In a second stage offering the bulk 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 2nd stage offerings are not the same kind of offerings that result when a public company sanctions a rise in the amount of its exceptional shares and then completes a secondary offering during which extra shares of stock are sold. This ends in a dilution of shareholder’s equity. The MHC 2nd stage offerings are accretive to stockholder equity as money is received for the sale of the majority shares in the second step IPO but the total number of major shares is not increased.
In a MHC second stage offering minority stockholders typically receive two to four shares of the new stock issue for each minority share owned in order to maintain their original share 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 earnings potential of the bank
90% Return with Low-risk
For instance, in my child Ryan’s education account, I acquired 500 shares of Bank Mutual Enterprise 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 afterwards conducted a second stage offering and sold the majority shares held by the holding company to depositors at the bank. As minority investors, we got 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 prevailing price of Bank Mutual is 12.20. Our 1,834 shares are now worth $22,374 which translates to a $10,624 profit and a 90% return.
The 90% return demonstrates the strong profit potential 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 varsity costs for Ryan!