farbelow
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I think the confusing is coming from thinking in percentages, ....
Hello Nate,
Thanks for your response: that is very helpful.
The original question I tried to answer was how earnings are treated of the bank: disproportionately accretive to the public shareholders or not. I realise that the example I gave convolutes the effect of the second offering and the effect of the retained earnings. And your suggestion to think in shares helped. My conclusion is that the retained earnings are in fact proportionately accretive. I.e. 10% earnings retained, results in 10% increase in intrinsic value per share.
The exception is when the bank pays dividend and the deposit holders waive their right to dividend.
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Does anyone know how the earnings generated by the bank are treated... Are the earnings disproportionately accretive to the shareholders or will earnings be divided between the MHC and shareholders based upon ownership %?
I am struggling with the MHC concept as well. Some feedback on the example below would be very helpful. I found the following article on MHC structure and second offering very helpful:
http://reminiscencesofastockblogger.com/category/regional-banks/
I split below the claim on earnings between the case of retained earnings and distributed earnings.
Retained earnings
I hope to get feedback on the following example. F.e. BV of the example bank is $100, public shareholders have 40% and P/B is 1. So public shareholders have $40. The bank earns $10 and retains all of it, so the BV becomes $110, 40% of this for the public shareholder is $44.
Now, after the second offering (and assuming share price is equal to bv):
- MHC holders pay 60% x $110 = $66 for the 60% shares issued.
- BV becomes $66 + $110 = $176
- 40% of the new book value is $70.4
So, the 10% earnings on $40 equity ownership, turns into $70.4 equity ownership, an increase of $30.4. Probably the second offering will be for a discounted share price, there will be a loan for stock option plan, a local charity contribution, etc. But this seems a large margin of safety.
Distributed earnings
According to the following article, the depositors need to waive their right on dividend each year:
http://www.fa-mag.com/news/mutual-banks-may-struggle-under-fed-dividend-rule-9799.html
Is this rule still applicable? In case the depositors waive their right, the earnings would remain disproportionately accretive to the shareholders otherwise not.
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