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What is a mutual conversion?
Of the roughly 4,000 banks in the United States today, 222 are mutual banks, according to the FDIC’s BankFind tool.
A mutual bank is unique in having its equity owned by its depositors. What that means in practice is that nobody really owns the bank. So when it converts from mutual to stock form, the IPO proceeds go back into the till.
For example: ABC Bank has equity of $50 million. It’s “worth” $50 million, so that’s how the IPO is priced. Investors write a collective check for $50 million, and it goes to the bank’s equity account, making it $100 million.
Two things immediately happen:
The price/book value goes from 1.00x to 0.50x
The bank has twice the capital ratio
The bank has more capital it can lever up and lend out, increasing earnings, and/or it can buy back stock after the first anniversary. On the third anniversary of the full IPO (banks often do this in two steps), the bank can be sold, creating meaningful gains.
Many investors, including Seth Klarman, Peter Lynch, Walter Schloss, and others, have profited from mutual conversions.
Below are 12 banks that came up on my screen, including 5 with the three-year restriction just lifted or about to be lifted and 7 upcoming.