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WealthEffect Winners  A Hidden Gem
Mutual Savings Banks |
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A mutual bank is owned by the depositors |
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When a mutual bank converts to stock ownership, depositors can buy shares | |||||||||||||||||||||
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These IPOs are usually very profitable | |||||||||||||||||||||
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A mutual bank is your classic hometown bank, the most famous of which is the Bedford Building & Loan in "It's a Wonderful Life." It is owned by its depositors, whose funds are lent to others in various types of loans, usually mortgages. You can become a depositor yourself for as little as $50 — the biggest drawback is that you have to sign up in person, the downside of nostalgia in an internet world. |
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Over time, many of America's mutual banks have chosen to convert to stock ownership; like any other company involved in an initial public offering (IPO), these formerly private banks sell shares to the general public. Unlike the typical IPO, however, depositors in mutual banks get first choice in the purchase of shares. Better still (for the depositors), the size of their deposits do not limit the amount of stock they can buy. A person with a $50 chequing account, for example, could nevertheless ask to purchase $50,000 of stock in the IPO! |
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Historically, these IPOs have been very profitable. The biggest reason for this is the unusual advantage a mutual bank has going into the public offering: the book value (assets minus liabilities) of a bank is essentially cash, and this cash remains the property of the bank after the offering; add to this the cash the bank receives from the IPO, and you will always be buying shares for less than the book value of the newly public bank. Another reason why mutual bank IPOs have done well, some suggest, is that the bank managements — which receive shares at the offering price — want that price set low enough to leave plenty of room for future gains. A third reason for the success of bank IPOs is that many of these banks were eventually purchased (at a premium) by larger banks looking to consolidate a banking industry strewn far and wide by the legislation of the Great Depression. Regardless of the reason(s), mutual bank IPOs have been a worthwhile opportunity for their depositors. For those interested in pursuing this hidden gem, WealthEffect provides a list of 788 mutual banks in the United States. |
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