Thrifts are community-based banks focused mainly on accepting deposits, originating mortgage loans and other basic bank services. Every so often, the owners of a thrift, either its depositors or a mutual holding company, decides to do a thrift conversion, which means offering shares to the public. Thrift conversions, which were at their apex in the 1980s and 90s, provided investors above-average returns. Today, there are fewer thrift banks and stricter regulations discourage mutual holding companies from doing thrift conversions.
A first-step conversion is one in which the thrift offers its shares to its depositors through an initial public offering. Essentially, the depositors buy back their own "capital," or in this case, their deposits. For example, a thrift with a net worth of $10 million issues one million shares at $10 per share, adding the $10 million from the IPO to its existing net worth. This results in shareholder's equity of $20 million, or $20 per share. A depositor immediately realizes a 100 percent return on his investment, excluding IPO costs and related fees.
In a second-step conversion, a MHC that owns majority ownership in a thrift sells the remaining outstanding shares to the public. The shares owned by the MHC are not actually outstanding, or what is available to the public. The value of the thrift is what really belongs to non-MHC holders. For example, Lamplighter Financial, an MHC, owned 74 percent of a Wisconsin-based thrift for an apparent market value of $124 million. However, the true market value of $33 million rests with the non-MHC holders, who own 26 percent of the bank. Given the thrift's tangible book value of $1.9 billion, the bank's market value to non-MHC holders is only 2 percent of tangible assets ($33 million divided by $1.9 billion). Since most bank's shares gravitate towards book value, non-MHC holders reap the reward.
Finding A Thrift Conversion
If you're vigilant, you may find a thrift that is in the process of a share offering. For starters, new thrifts can't sell shares for three years and can't buy back stocks for at least for one year. You can ask your broker about thrift conversions in the works. You can also set up a watchlist for the savings and loans sector using your brokerage account or a generic screener using Yahoo! Finance. Look for thrifts that are in the process of a first-step or second-step conversion. This information is readily available in the thrifts regulatory filings through the SEC's website. For example, on January 27, 2011, Atlantic Coast Financial Corporation, operating under ticker ACFC, filed an 8-K announcing an extension of an additional sale of 1.7 million shares.
Once you locate a thrift that you're interested in, delve through its financials to look for value. The key metric to look for is tangible book value to market value from the perspective of a non-MHC shareholder. To calculate tangible book value, divide tangible assets by shareholder's equity. Tangible assets exclude such items as goodwill and other intangible assets. Market value is the current share price multiplied by the shares outstanding to non-MHC shareholders. For example, if a thrift's tangible assets are $100 million and it has $10 million in non-MHC shareholder's equity, the tangible book value is $10 per share. Look for a thrift selling far below it tangible book value.
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