Mutual Savings Banks: The Biggest Secret on Wall Street

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Includes: BFBC, BFIN, CBNK-OLD, HBNK, LEGC, NFSB, OCFL, RYFL
by: Eddy Elfenbein

Eddy Elfenbein submits: Well, I've had a similar title before, but here's another very big secret on Wall Street -- mutual savings banks.

Don't laugh, whenever you hear that a mutual savings bank is about to go public, pay attention. A mutual savings bank is a bank that's "owned" by its depositors. Most of these institutions are a zillion years old. They're well run, and they basically have zero overhead.

Most are still based in the Northeast. Every year, a few more decide to go public, and that can be very good news. When the bank has an IPO, the depositors usually get first crack at buying the shares. Also, the IPOs tend to do very well. This is from the Wealth Effect Web site:

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 that 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.

A few days ago, a reader asked me about Hampden Bancorp (NASDAQ:HBNK), which is a MSB that just went public. The bank was founded in 1852, and it has seven branches in and around Springfield, MA.

Last month, the bank sold 7.6 million shares to its depositors at $10 a pop, and the stock is already around $12.50. I found the prospectus at the bank's Web site. The prospectus also lists the seven MSB IPOs since the beginning of 2005, and the performance of their shares.

Stock.......................................................IPO......After 1 Day....Through 9/1/06
Chicopee Bancorp (NASDAQ:CBNK-OLD).................7/20/06........44.6%.......46.1%
Newport Bancorp (NASDAQ:NFSB)..................7/7/06..........28%..........36.2%
Legacy Bancorp (NASDAQ:LEGC)....................10/26/05......30.3%.......50.4%
BankFinancial (NASDAQ:BFIN) .......................6/24/05.......36%..........74.7%
Benjamin Franklin (BFBC)..................4/5/05..........0.6%........40.7%
OC Financial (OCFL)............................4/1/05.........20%..........10%
Royal Financial (OTCQX:RYFL).......................1/21/05........16%...........51%