What is a Mutual Savings Bank?

A Mutual Savings Bank is just like any normal bank or financial institution chartered through a state or the federal government to provide an FDIC-insured, safe place for individuals to save their hard-earned moeny and in turn invest those savings into mortgages, loans, bonds, stocks & other securities.

How is a Mutual Savings Bank Different from other banks?

The difference is that a Mutual Savings Bank is chartered in a way that the Depositors Own the Bank! In other words, the bank does not have shareholders that keep the profits, in the likes of the Citigroups and the JP Morgans of the world. The profits, if any, are somehow passed on to the Depositors. The first United States savings banks were envisioned as philanthropic endeavors, designed to uplift the poor and working classes. The banks were started by philanthropists, who took on the positions of savings bank trustees, managers, and directors as opportunities to teach the lower classes the virtues of thrift, and self-reliance by allowing them the security to save their money. The first incorporated US mutual savings bank was the Provident Institution for Savings, in Boston. Its 1816 charter was the first government legislation in the world to safeguard savings banks.

What is the goals of Mutual Savings banks?

Mutual savings banks were designed to stimulate savings by individuals; the exclusive function of these banks is to protect deposits, make limited, secure investments, and provide depositors with interest. Unlike commercial banks , savings banks have no stockholders; the entirety of profits beyond the upkeep of the bank belongs to the depositors of the mutual savings bank. Mutual savings banks prioritize security, and as a result, have historically been characteristically conservative in their investments. This conservativism is what allowed mutual savings banks to remain stable throughout the turbulent period of the Great Depression, despite the failing of commercial banks and savings and loan associations.

Where do I find Mutual Savings Banks in the United States?

Due to the fact that Mutual Savings Banks are a dying breed of our modern financial system, it is not a surprise that most mutual savings banks are located in the Northeast and some in the older States of the Union, rather than the West. There are very few still active Mutual Savings Banks Left today. We have put together a complete list here.

How can one Invest & Profit from a Mutual Savings Bank?

Because Mutual Savings Banks are inherently inefficient to hard-core capitalists, over tiem, most of American Mutual Savings Banks have chosen to convert to a stock ownership, becoming regular commericial banks with shareholders. The process of conversion is called Demutualization and it's done through an Initial Public Offering (IPO). Unlike the typical IPO, however, because the depositors own the bank , the managemnet of the bank is forced by its charter to offer depositors 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. In general, a depositor with a $100 chequing account or more, is offered to buy as much as $50,000 worth of stock in the IPO if he wants to at the IPO price.

So by opening an account in one of the few remaining Mutual Savings Banks in the United States today you can set yourself up for tremendous gains, when that bank will go public because you will be one of the few people who will be offered the chance to buy the stock at that low price.

Why do Mutual Savings Banks that have had an IPO in the past had stocks that historically performed well?

Although there are no guarrantees, historically Mutual Savings Banks that go public have shown tremendous gains in their stock compared to the IPO price. The reasons are outlined below:

• Mutual Savings Banks have this unusual advantage when 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.
• Mutual Savings Banks are normally smaller banks in key markets and they are takeover targets. They go public after a management plan to eventually sell the bank to a bigger bank for a price 3-4 times higher than the IPO price.
• The banks will have to turn from a Community Organization, locally operated and with the benefit of the Community in mind, to a corporation that reports to stockholders. Management will generally institute reforms to make the bank more competitive, more efficient and more sales oriented over time, which will lead to better returns and eventually higher profits and a higher stock price. A hard-core capitalist could argue that Mutual Savings Banks are an anachronism; basically inefficient local instituttions that have a lot of fat that can be squeezed out. The windfall fromt this squeezing will come to the shareholders and the sooner one buys stock, the better it is. So, the ones who buy at the IPO price are usually the most better-off.
• The management of the bank, accountable to depositors at the time the bank is still a Mutual Savings Bank, has the ability to set the IPO price at a disproportionately low price. Their compensation packages (and golden parachutes in case of a future takeover or merger) are based on the performance of the stock AFTER the bank goes public. As a result, the management has an additional incentive (besides showing successful) to set the initial offering (IPO) price at a low level.

What does the historical performance of the stocks of Mutual Savings Banks going public show?

Several studies analyzing the performance of stocks of Mutual Savings Banks that went public through the Demutualization process show that the investors that purchased those stocks at the Initial Public Offering (the depositors before the bank went publc), made well above-average returns within the first one, three, and five years of going public.

The majority of the Banks that went public were eventually bought by a bigger bank at a premium of 200-400% of the offering price within 5 years of going public.

What steps does one take to position oneself to take advantage of this opportunity?

In order to be offered stock in a potential Demutualization, one will need to be a depositor of the Mutual Savings Bank. Although these rules are not written in stone, in general, one will need to have an account at the Bank for one year or more and will need to have at least $100 in there.

These rules are not always applicable but they are set in one way or another so that the Bank does not offer stock to people who open an account last minute so that they can purchase stock to flip it. Their goal is to turn loyal depositors to loyal shareholders and weed out speculators.

Also, most of these banks do not offer remote internet banking. In several cases, the only way to open an account only is in person. Some might be able to open an account for you by mail, although in the after September 11 era, that might not be an option either. You should try to contact the banks either by mail or by phone to check with each one. For your convenience, you can find the more than 700 remaining Mutual Savings Banks by State here.

Happy & Profitable Investing!

This article was written by Alexander Mizan,
principal of Turnaround Analysts and Expense Reduction Pros