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Banks with MHC structure?


fishwithwings
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There is no easy way to do this. 

 

1) Some holding companies have MHC in their name, you can screen for those.

2) Screen for banks that are mutually owned, but have a holding company (probably the most reliable method).

3) Get a copy of the list from an investment bank.  There are a few of these floating around, not all have the same MHC's on them, but they're a good starting point.

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http://www.federalreserve.gov/bankinforeg/afi/slhc_mhcfilings.htm

 

I'm pretty sure you can request the information from your federal reserve.

 

Easier said than done. I've spent the last six months trying to get information from each Fed District. Each is different, some require FOIA requests, others you just have to know the right person. Prices are all over the board, from $.10 per page at some districts to free at others.

 

If you go this route here is my advice. Find the right person and get their direct phone number and email. Until I found the right contact at each Fed for what I'm doing it was like hitting a brick wall repeatedly.

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Guest Schwab711

http://www.federalreserve.gov/bankinforeg/afi/slhc_mhcfilings.htm

 

I'm pretty sure you can request the information from your federal reserve.

 

Easier said than done. I've spent the last six months trying to get information from each Fed District. Each is different, some require FOIA requests, others you just have to know the right person. Prices are all over the board, from $.10 per page at some districts to free at others.

 

If you go this route here is my advice. Find the right person and get their direct phone number and email. Until I found the right contact at each Fed for what I'm doing it was like hitting a brick wall repeatedly.

 

Thanks, good to know! I haven't tried it but I assumed there would be so steep fees. FOIA requests just print and don't ask you which pages you'd like. They can be pretty expensive.

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BeyondProxy had an article in 2014 that listed a bunch: http://www.beyondproxy.com/sifting-thrifts/

 

I've looked at a number of these and also found some other ones. What I've found is that they seem to trade in line with other small community banks without a MHC structure. The partially converted thrifts don't seem to get a higher price-to-book multiple by the market. If you adjust the market cap for the true number of outstanding shares some of them are trading at huge discounts.

 

My question is why that is and whether it is justified. Is it because this is a completely overlooked part of the market? Is it also somewhat justified because there is no way to know when a second step conversion will occur and your investment is more or less "dead money" in the meantime? I also thought directors might have an incentive not to convert, because they probably control the votes of the MHC shares and will be in control of the entire company as long as they control those shares. If they convert, bank activists could show up and threaten their position.

 

Does this make sense? Are there other reasons? Community banks and MHC's are still unfamiliar territory for me and I'm trying to understand it a little better.

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BeyondProxy had an article in 2014 that listed a bunch: http://www.beyondproxy.com/sifting-thrifts/

 

I've looked at a number of these and also found some other ones. What I've found is that they seem to trade in line with other small community banks without a MHC structure. The partially converted thrifts don't seem to get a higher price-to-book multiple by the market. If you adjust the market cap for the true number of outstanding shares some of them are trading at huge discounts.

 

My question is why that is and whether it is justified. Is it because this is a completely overlooked part of the market? Is it also somewhat justified because there is no way to know when a second step conversion will occur and your investment is more or less "dead money" in the meantime? I also thought directors might have an incentive not to convert, because they probably control the votes of the MHC shares and will be in control of the entire company as long as they control those shares. If they convert, bank activists could show up and threaten their position.

 

Does this make sense? Are there other reasons? Community banks and MHC's are still unfamiliar territory for me and I'm trying to understand it a little better.

 

I took a look at the list on beyond proxy's website and spent a few hours reviewing the six "highlighted opportunities."  IMO they are more attractive than the general market, however most of these shares with the exception of MSVB are not "deeply" undervalued (i.e. 40-50% discount).  As for MSVB the shares are illiquid and its tough to purchase a material position.  Thoughts?

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I've owned PBHC from that list, but sold it recently.

 

I stick to a few rules for investing in community banks to protect myself since I'm not a competent bank analyst. MSVB has 4.0% non-perfoming assets which is too high for me, I don't touch banks with NPA's > 3%.

 

One bank with a MHC structure that I like and still own is Gouverneur Bancorp (OTCMKTS:GOVB). The company doesn't post annual reports on its website, but you can piece things together from their press releases on OTCMarkets and old SEC-filings from when they were still a reporting company. If you own shares you should receive future annual reports and proxy statements. The stock is very illiquid, but that doesn't bother me.

 

Here's some data about GOVB:

 

Market cap: $30.4 million

Shares outstanding: 2,223,931

MHC ("Cambray MHC") owns 1,311,222 shares or 58.96% of the shares outstanding

Adjusted market cap: $12.5 million

Shareholders' equity March 30, 2015: $28.3 million

 

GOVB's return on assets has been greater than 1% since 2010. Their NPA's have been below 3% in this period. Their equity to assets ratio was 19% at the end of 2014.

 

I've bought GOVB some time ago when the stock was trading around $10. At that point I think it was trading below book value even without adjusting the market cap for the MHC shares. I figured it was worth a bet, even though I still didn't (and don't) understand many things about investing in this space and how to think about valuation for banks with a MHC structure.

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I've owned PBHC from that list, but sold it recently.

 

I stick to a few rules for investing in community banks to protect myself since I'm not a competent bank analyst. MSVB has 4.0% non-perfoming assets which is too high for me, I don't touch banks with NPA's > 3%.

 

One bank with a MHC structure that I like and still own is Gouverneur Bancorp (OTCMKTS:GOVB). The company doesn't post annual reports on its website, but you can piece things together from their press releases on OTCMarkets and old SEC-filings from when they were still a reporting company. If you own shares you should receive future annual reports and proxy statements. The stock is very illiquid, but that doesn't bother me.

 

Here's some data about GOVB:

 

Market cap: $30.4 million

Shares outstanding: 2,223,931

MHC ("Cambray MHC") owns 1,311,222 shares or 58.96% of the shares outstanding

Adjusted market cap: $12.5 million

Shareholders' equity March 30, 2015: $28.3 million

 

GOVB's return on assets has been greater than 1% since 2010. Their NPA's have been below 3% in this period. Their equity to assets ratio was 19% at the end of 2014.

 

I've bought GOVB some time ago when the stock was trading around $10. At that point I think it was trading below book value even without adjusting the market cap for the MHC shares. I figured it was worth a bet, even though I still didn't (and don't) understand many things about investing in this space and how to think about valuation for banks with a MHC structure.

 

Thanks for the idea.  I've sent an email to the company requesting the financials.

 

I've put together an excel sheet of a few banks with the MHC structure.  If you or anyone would like a copy/want to discuss, send me a PM.

 

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  • 2 weeks later...

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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Farbelow:

 

I think the confusing is coming from thinking in percentages, I prefer to avoid that.  Think of it like this.

 

Bank has issued 1,000 shares, 40% public and 60% to the MHC.  The market tends to value these things on the full shares, even though only 40% are public.  The problem is these are strange structures that most of the market doesn't understand.

 

What you have is a bit of a bonus because if the bank conducts a second step they'll IPO the 60% and raise additional capital.  As a shareholder you'll be able to participate in the IPO and add at usually attractive prices.  If you don't add to your stake you still benefit, post-transaction you own 40% of an institution with more capital.  The ownership percentage doesn't change.  So 40% of 100 in capital before, and 40% of 160 in capital after the transaction.

 

Second steps don't tend to do as well as full conversions.  These are strange hybrids that regulators are trying to extinguish.  I'd be surprised if there are any more MHC's created.  All mutuals are being encouraged to fully convert at this point.

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Farbelow:

 

I think the confusing is coming from thinking in percentages, I prefer to avoid that.  Think of it like this.

 

Bank has issued 1,000 shares, 40% public and 60% to the MHC.  The market tends to value these things on the full shares, even though only 40% are public.  The problem is these are strange structures that most of the market doesn't understand.

 

What you have is a bit of a bonus because if the bank conducts a second step they'll IPO the 60% and raise additional capital.  As a shareholder you'll be able to participate in the IPO and add at usually attractive prices.  If you don't add to your stake you still benefit, post-transaction you own 40% of an institution with more capital.  The ownership percentage doesn't change.  So 40% of 100 in capital before, and 40% of 160 in capital after the transaction.

 

Second steps don't tend to do as well as full conversions.  These are strange hybrids that regulators are trying to extinguish.  I'd be surprised if there are any more MHC's created.  All mutuals are being encouraged to fully convert at this point.

 

Nate,

Do you know how the second step shares are priced?

Thanks

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Farbelow:

 

I think the confusing is coming from thinking in percentages, I prefer to avoid that.  Think of it like this.

 

Bank has issued 1,000 shares, 40% public and 60% to the MHC.  The market tends to value these things on the full shares, even though only 40% are public.  The problem is these are strange structures that most of the market doesn't understand.

 

What you have is a bit of a bonus because if the bank conducts a second step they'll IPO the 60% and raise additional capital.  As a shareholder you'll be able to participate in the IPO and add at usually attractive prices.  If you don't add to your stake you still benefit, post-transaction you own 40% of an institution with more capital.  The ownership percentage doesn't change.  So 40% of 100 in capital before, and 40% of 160 in capital after the transaction.

 

Second steps don't tend to do as well as full conversions.  These are strange hybrids that regulators are trying to extinguish.  I'd be surprised if there are any more MHC's created.  All mutuals are being encouraged to fully convert at this point.

 

Nate,

Do you know how the second step shares are priced?

Thanks

 

Yes, almost universally at $10 a share.  Occasionally at $8 a share.  I have no idea why, this is the standard.

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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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