Stock Prices of Converted Mutuals Returning to Earth
Padgett, Tania, American Banker
Two years ago, investing in a mutually owned savings institution was like betting on a race where every horse is declared a winner before the gates open.
At the time, investors routinely reaped substantial profits when such companies went public, in a process known as a "mutual conversion." It wasn't uncommon for stock prices to soar 30% and 40% on the first day of trading.
Even renowned stock picker Peter Lynch of Fidelity Investments once noted that when it comes to mutual saving banks, "it's hard to find a wrong stock."
Today, mutual savings banks and thrifts continue to convert to stock form at a healthy clip, but the appreciation of their shares has slowed to a crawl. Indeed, a fair number of recent mutual conversions trade beneath their IPO prices.
Experts say softness in the IPO market reflects a successful effort by Congress to control the windfalls investors were getting on the deals a few years ago.
Compounding the problem, they say, thrift stocks generally have been hit by rising interest rates this year. And the sector's valuations have been retreating from levels they had reached last year when merger speculation was at a high.
Conversions "have hit a weak market," said thrift analyst John Kline with Ryan, Beck & Co. "It picked up in 1995, but in the last run of deals the smaller, more illiquid ones have been trading down."
Thirty-three mutual conversions have taken place this year, up from 29 during the first six months of last year.
On average, shares of mutual banks that went public this year gained 10.263% on the day of issue, according to SNL Securities, Charlotte, N.C. Last year the average first-day rise was 10.7%.
The average stock price for this year's mutual conversions advanced 12.48% after several months, but six of the 33 mutual conversions trade beneath their IPO price.
Among the latter are First Bergen Bancorp, Wood-Ridge, N.J.; Yonkers (N.Y.) Financial Corp., and Lexington (Mo.) B&L Financial Corp. All three thrifts went public at $10 a share in the past three months - and all now trade for between $9 and $10.
* First Bergen, which went public April 1, saw its shares tumble to $9.75 by midafternoon that day. By 2 p.m. Tuesday, shares were trading at $9.125.
* Shares of Yonkers Financial, which began trading April 18, fell to $9.875 by the middle of that day. Shares were at $9.75 Tuesday afternoon.
* Lexington B&L dropped to $9.50 on June 6, the day of its public offering. Shares had made a partial comeback by Tuesday, trading at $9.875. In 1994, Congress became concerned that professional investors and management were "profiting obscenely" from the initial surges in stock price that took place when thrifts went public, said Chris Smith, a conversion research editor at SNL Securities.
He said the companies that evaluate thrifts about to go public responded by awarding a higher value to the thrifts being converted. …