Buying shares in Demutualized bank

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SlowMovingInvestor
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Buying shares in Demutualized bank

Post by SlowMovingInvestor » Thu Feb 22, 2018 4:14 pm

I had an account in a small local bank (50 branches or so) that I closed over a year back. It seems that the bank is demutualizing and my account happened to be open in the 'qualification period'. I was sent a form that allows me to subscribe to shares when it goes public.

From what I know, it's a fairly solid, well capitalized, long lasting (100 years), generally profitable bank (although I'm certainly not an expert in bank financial statements). I know the boglehead philosophy is to generally avoid individual stocks, but I have heard that there are sometimes good arbitrage opportunities in buying shares of a mutal bank when it goes public, if you can get them . I'm certainly not averse to a quick flip that gets me around 15% or so.

I would be investing a small portion of my net worth in this, probably around 0.5% at most. Any thoughts ?

KT785
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Re: Buying shares in Demutualized bank

Post by KT785 » Thu Feb 22, 2018 4:33 pm

Reminds me of a Planet Money episode that discussed this subject.

SlowMovingInvestor
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Re: Buying shares in Demutualized bank

Post by SlowMovingInvestor » Sat Mar 03, 2018 10:53 am

KT785 wrote:
Thu Feb 22, 2018 4:33 pm
Reminds me of a Planet Money episode that discussed this subject.
That is certainly entertaining, although I suspect the easy money has already been made on that. I do remember reading in one of Lynch's books that he liked to open accounts in mutual S&Ls to keep track of them so he'd know then they decided to go public.

Any other comments or personal experience ? i need to make a decision soon.

Thanks

straws46
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Re: Buying shares in Demutualized bank

Post by straws46 » Sat Mar 03, 2018 12:55 pm

Stock in a bank used to be assessable back when I knew something about it. If you owned stock in a holding company you were protected from assessments made by regulators. That was not the case if you owned stock in the individual bank or thrift. Assessments may occur not only if the institution is poorly run, but if it is well run and outgrows its capital. Look into that before you invest.

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Pajamas
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Re: Buying shares in Demutualized bank

Post by Pajamas » Sat Mar 03, 2018 2:34 pm

SlowMovingInvestor wrote:
Thu Feb 22, 2018 4:14 pm
I had an account in a small local bank (50 branches or so) that I closed over a year back. It seems that the bank is demutualizing and my account happened to be open in the 'qualification period'. I was sent a form that allows me to subscribe to shares when it goes public.

From what I know, it's a fairly solid, well capitalized, long lasting (100 years), generally profitable bank (although I'm certainly not an expert in bank financial statements). I know the boglehead philosophy is to generally avoid individual stocks, but I have heard that there are sometimes good arbitrage opportunities in buying shares of a mutal bank when it goes public, if you can get them . I'm certainly not averse to a quick flip that gets me around 15% or so.

I would be investing a small portion of my net worth in this, probably around 0.5% at most. Any thoughts ?
There is probably a limit on the number of shares you can buy so you need pretty big gains to make it worth the trouble. If it isn't a likely candidate for takeover in the first few years, then it probably isn't worthy of consideration at all.

I just checked and I see that the only one that I ever even considered investing in did well for the first few years but is now trading for a fraction of its IPO price. It even had to do a reverse split at some point. That is a community-based bank that was and still is very mission-oriented. I walked past it on the way to work and saw the posters in the window back in the 1990s when lots of small savings banks were going public.

So you shouldn't deceive yourself that all demutualizations work out profitably.

Grt2bOutdoors
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Re: Buying shares in Demutualized bank

Post by Grt2bOutdoors » Sat Mar 03, 2018 2:56 pm

Buy, banks that go through an ipo are doing so to realize a multiple of tangible book value. Usually the ipo shareholders will get to buy in at or below 1x tangible book and upon ipo obtain a valuation of 1.1-1.3x book depending on market franchise. Anytime you are handed free money you should say thank you and take it. (Small wager).

My relatives bought into such a demutualization, a $1,000 investment became worth over $10k in less than 15 years, not including dividends. Company is still public today.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

tim1999
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Re: Buying shares in Demutualized bank

Post by tim1999 » Sat Mar 03, 2018 3:07 pm

My significant other has accounts at Columbia Bank in NJ, apparently they are doing some kind of stock offering and she received paperwork through which she can "subscribe" to buy stock at $10 per share by 3/15. It just seems vague on how/where the stock will trade.

Grt2bOutdoors
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Re: Buying shares in Demutualized bank

Post by Grt2bOutdoors » Sat Mar 03, 2018 8:44 pm

tim1999 wrote:
Sat Mar 03, 2018 3:07 pm
My significant other has accounts at Columbia Bank in NJ, apparently they are doing some kind of stock offering and she received paperwork through which she can "subscribe" to buy stock at $10 per share by 3/15. It just seems vague on how/where the stock will trade.
The stock will trade on an exchange - you can find this information in the offering memorandum. Where as in what price will be determined by market demand or lack thereof.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

TheAncientOne
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Re: Buying shares in Demutualized bank

Post by TheAncientOne » Sat Mar 03, 2018 9:15 pm

Assuming the bank is solid, this is as close to free money as you can get in the stock market. The current value of the bank prior to the IPO is owned by no one so those who buy shares in the IPO become owners of that previously unclaimed value. Buy as many shares as you can. If you have time prior to the time you need to make your purchase, save like crazy, including suspending 401k contributions that aren't being matched by your employer.

The 19th hole
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Re: Buying shares in Demutualized bank

Post by The 19th hole » Sat Mar 03, 2018 10:27 pm

Best thing that ever happened to me.

In the early and mid 90's the NY City area savings banks started demutualizing. The bank I used was one of the first and when I looked into it I opened accounts in about a dozen other banks. I tried to get into all of the IPOs (I got shut out of a couple) but I made money on virtually all of them (one may have been a push). I bought with the intention of holding the stocks through the consolidation phase and all of the banks (except one) eventually became part of Capital One.

without a doubt the best investment decision I ever made. If memory serves all of the stocks (once again, except one) were up at least 20% soon after the IPO.

Raabe34
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Re: Buying shares in Demutualized bank

Post by Raabe34 » Sat Mar 03, 2018 11:48 pm

I had the chance to get in on one in 2012. Just did the basic math of current equity + capital raise and figured it out per share. Most smaller banks trade @ roughly 1.5X equity so I figure we'd get to $15 from $10 at IPO fairly quickly. First day of trading it made it to $14 and it doubled in the first year and I sold it at that point. I only had 20k in cash to buy it initially but one guy I work with had a way to buy 800k of it and has made over a million on paper on it so far.

MCBK

SlowMovingInvestor
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Re: Buying shares in Demutualized bank

Post by SlowMovingInvestor » Sun Mar 04, 2018 10:14 am

Thanks for all the responses. I will say that this is supposed to be a partial demutualization, just less than a majority. I'm not sure if that changes some of the calculus on whether/how much to invest.

Also, I'm certainly not an expert on valuing small banks, but it seems from the comments here (and some reading I've done) that book value is an important factor determing small bank value (unlike big banks, which have signifcant trading and investment banking revenues). The offering is going to be at or slightly above book value, but slightly below a public 'peer group'.

I'm certainly not expecting a lot of money here, but a 20-25% quick flip is nothing to turn one's nose up at !

Valuethinker
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Re: Buying shares in Demutualized bank

Post by Valuethinker » Sun Mar 04, 2018 1:02 pm

SlowMovingInvestor wrote:
Sun Mar 04, 2018 10:14 am
Thanks for all the responses. I will say that this is supposed to be a partial demutualization, just less than a majority. I'm not sure if that changes some of the calculus on whether/how much to invest.

Also, I'm certainly not an expert on valuing small banks, but it seems from the comments here (and some reading I've done) that book value is an important factor determing small bank value (unlike big banks, which have signifcant trading and investment banking revenues). The offering is going to be at or slightly above book value, but slightly below a public 'peer group'.

I'm certainly not expecting a lot of money here, but a 20-25% quick flip is nothing to turn one's nose up at !
Yes you are probably going to get stock at around book value.

http://www.mch-inc.com/pdf/AFG%20Res%20 ... BMoore.pdf

https://mercercapital.com/assets/Handou ... 021913.pdf

https://seekingalpha.com/article/398314 ... nity-banks

https://www.investopedia.com/articles/i ... -thing.asp

Investment banking is generally a bad business-- increases the compensation to income percentage, and increases the risk of the bank.

you can bet a few percent of your portfolio on this, assuming that:

- you can accept potential illiquidity
- you can accept losing it - that should not happen (community banks are safer than investment banks) but it could happen

Either you will be rewarded with a healthy dividend stream over time, or the bank will eventually get snapped up.

In the UK, my spouse had Halifax shares (demutualized building society) which then merged with Bank of Scotland. Shares were worth maybe 2,000 pounds at one point after they merged with Bank of Scotland to form HBOS.

I said hold on-- they paid 3% dividend yield and looked "cheap". Then, it turned out they had £120bn of bad loans, had to be merged with Lloyd's, Lloyd's then had to be rescued by government.

Worth a couple of hundred pounds now. :oops: :oops:

Don't get too greedy if you do this is my moral.

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nedsaid
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Re: Buying shares in Demutualized bank

Post by nedsaid » Sun Mar 04, 2018 1:27 pm

I personally would probably go for it. It would be fun and potentially very profitable. Just don't overdo it as of course there are risks involved.
A fool and his money are good for business.

Kidneydoc
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Re: Buying shares in Demutualized bank

Post by Kidneydoc » Sat May 19, 2018 12:18 pm

CLBK up 70.24% after minority public offering. Most of the executives and directors maxed out on the initial offering at 55,000 shares at $10/share, and are continuing to buy at prices >$15.(https://www.gurufocus.com/insider/CLBK) Likely secondary offering in the future, but company may not want to lose control of decision making process to hedge funds and activist shareholders if too much equity is given away. 3 years out, legal restrictions to selling entire company will be gone. Demutualization can be very profitable for the depositor, as nominal owner, you can purchase shares at the same price as the executive suite.
As a cautionary tale, we broke even on secondary offering of Hudson City Savings Bank, a well run NJ bank, which got crushed by the financial crisis 2007-2009. When interest rates dropped to save the large banks, the small banks got killed as their loans got refinanced at lower rates. I met an Hudson City Saving Bank executive, who told me that they did everything right in terms of prudent lending, but lower interest rates killed their profits.

Billavoider
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Re: Buying shares in Demutualized bank

Post by Billavoider » Sat May 19, 2018 6:35 pm

I was in the second tier for CLBK in a minority share offering as it was oversubscribed. I have participated in one initial stock offering successfully and the other I received my subscription back.

I ended buying some shares in the open market at least 50% more than the initial offering.

If you have a chance to do it, you should participate.

The Office of Thrift Supervision or OTS (now the OCC) had rules which determined the eligibility based on when you opened your depository account or if you had a loan with the institution. Longest tenured deposit account members were rewarded in the first tier.

The first tier is usually for its longest established depositors; second tier is usually for depositors that established their depository accounts after the first tier; third tier is for newly established deposit accounts or loan accounts established as of prior time. Finally, their is a community offering is not enough depositors subscribe to the stock offering.
Last edited by Billavoider on Sun May 20, 2018 10:48 am, edited 1 time in total.

dharrythomas
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Re: Buying shares in Demutualized bank

Post by dharrythomas » Sat May 19, 2018 9:44 pm

I have no experience with demulualization, but did invest in a couple of bank start-ups.

One is not listed anywhere, after 16 years, the first offered to buy back shares at book value (4x initial purchase price), after 18 years, we've received more than the initial purchase price in dividends.

One, after 10 years, is listed on a private electronic exchange for non-listed banks. But they've only increased book value per share by 40%. Btw, they opened in the late summer/fall of 2008 so they should have been able to avoid the crisis and other stuff is up 2-3x. They have plowed capital into interstate expansion pushing growth over dividends. They've also had additional stock issues at book value. Nearest I can tell, the people making the most money are the employees with stock options.

You may be able to make some money with it, but that's a bug not a feature. Like with insurance companies, demutualization is usually more about a windfall for insider employees than either the fiscal strength of the institution or account holders.

Good luck.

Dantes
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Re: Buying shares in Demutualized bank

Post by Dantes » Sun May 20, 2018 7:55 am

dharrythomas wrote:
Sat May 19, 2018 9:44 pm

You may be able to make some money with it, but that's a bug not a feature. Like with insurance companies, demutualization is usually more about a windfall for insider employees than either the fiscal strength of the institution or account holders.
Where I used to work I could stand on a street corner a few blocks away from the main streets and see seven banks and credit unions. Many of them were obscure (to me) banks on a race to expand. So maybe they have 50 or 100 branches. Who is going to buy them if those 50 or 100 branches are mostly neighbors of the branches you already have?

I know nothing about banking, but it seems to me every tiny location is already saturated. I'd certainly like to know how they are going to make money.

Mitchell777
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Re: Buying shares in Demutualized bank

Post by Mitchell777 » Sun May 20, 2018 9:04 am

I invested in a couple of these over the years and passed on a third. The first couple were easier to analyze as there was one tier only. If someone was buying a bank, let's say a small bank with limited ownership as an example, they would put up the money to buy the bank and the former owners would take their money. With these conversions, you invest in the new bank and all the prior net worth of the bank (that had been owned by the depositors of the bank) stays in the bank and is now yours (yours and the other new investors). Now if the bank has been poorly run, it's a problem. The first step is to calculate the book value of the bank and analyze what it may be after the conversion. The more money they allow to be invested in total (oversubscribe), the worse the deal can be, but worse is just a relative term.

chw
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Re: Buying shares in Demutualized bank

Post by chw » Sun May 20, 2018 9:38 am

I would probably consider it after some basic research. Some hedge funds employed a strategy opening accounts a mutual banks across the US just for the purpose of gaining access to their IPOs as they went public. Main issue you will have is when to exit the position.

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