Mutual thrifts were originally formed to encourage the working class to save and have their money be in a safe institution. They were formed by business people and civic leaders to teach workers to be thrifty, save and improve their lot in life.
The First Mutual Thrift
The first one was incorporated in 1916 in Boston, and hundreds more eventually sprang up across the U.S. As they were designed to be conservative in nature, making limited types of loans and investments, they held up much better than the larger commercial banks during the Depression and popularity grew among the fast-growing middle class when the economy improved.
Mutual thrifts have no shareholders and are owned by the depositors. Interest in the institution cannot be bought or sold and there is no access to the capital markets. As the industry expanded and many of the thrifts were of substantial size and wanted the opportunity to expand and grow. Legislation was passed that allowed them to convert their ownership structure and become stockholder-owned banks.
Although it was not the intent, this simple move caused one of the greatest ongoing opportunities in stock market history.
When Conversion Moved to Town
Conversion of a mutual thrift begins with a vote of the board of directors on a plan that details the conversion process. The second step is that the thrift is required to obtain an independent appraisal of its value. Shares are sold first to depositors, then executives and officers and finally the public. Let's look at a simplified example of a thrift transaction. The thrift is appraised at $100 million, so the sell 10 million shares at $10 to depositor's executives and the public. The deal is done and everyone is happy.
Now let's look at what we have in our newly public banks. We have 10 million shares and a bank that still has the 100 million of original equity and the $100 million of fresh new cash from the offering. The true worth is now $20 a share, or double the offering amount. Often the stock will move up a few dollars in the after-market, but then over anxious investors do what individual investors have always done and take profits far too soon.
Traders are left with a stock trading at maybe $12 or $13 in a company worth $20 and flush with cash. For literally decades astute investors have been buying shares in these new entities and enjoying outsized profits over the next several years.
Usually these stocks end up getting bought out. Since they were a mutual savings institution with stricter rules about lending and investing, they tend to have sparkling balance sheets with very few credit problems. They are also flush with cash as a result of the cash received in the offering. The new banks cannot be sold for three years after the offering but they don't last much longer than that. More than 70 percent of all newly converted thrifts are taken over within 4.5 years or so.
So far in 2013, five thrift conversions have been done. Two are too small even to mention here, but the other three look to be attractive investments. They are subject to the usual one-year restriction on stock buybacks and of course the three-year takeover ban, but patient investors should do very well with these stocks.
Westbury (WBB) Bancorp is a smaller bank with 12 branches in Washington, Waukesha and Milwaukee Counties in Wisconsin. The stock trades at just 72 percent of post conversion book value and has excess capital with equity to assets ratio of more than 15. Nonperforming assets are just 1.72 percent of total assets so the bank has no credit issues to speak of at this point.
Northfield Bancorp (NFBK) has moved up since its second step offering was completed earlier this year and trades at a very small premium to book value. The capital ratio is over 20 as a result of the conversion offering and with headquarters in Staten Island and branches in New York and New Jersey they are in of the most over-banked areas in the U.S.
Charter Financial (CHFN) has 16 branches in branches in West Central Georgia, East Central Alabama and the Florida Gulf Coast. The conversion offering has left them with equity to assets ratio of 24 and the stock trades at about 87 percent of tangible book value. Non-performing assets are minuscule 0.52 of the banks total assets, so the loan portfolio is rock solid.
These banks may not be the most exciting stocks you ever own but there is a very good chance that thrift conversions can bore you all the way to spectacular returns.
Mr. Tim Melvin is a value investor, money manager and writer. He has spent the last 27 years as in the financial services and investment industry as a broker, adviser and portfolio manager. He has also written and lectured extensively on the markets with his work appearing on RealMoney.com, DailySpecualtion.Com as well as several print publication including Active Trader and the Wall Street Digest. Click to watch Tim Melvin's FREE webinar and learn how to break through volatility using his value stock strategy.