Overlooked Banks Tend to Outperform

Updates to add stock quotes.

NEW YORK (TheStreet) -- Amid the roughly 1,300 publicly-traded banks and thrifts lies a group of semi-public institutions that are poorly understood and often overlooked by investors.

Known as mutual holding companies (MHCs), these banks have an unusual capital structure that offers some distinct advantages over more traditional names. Less than half their shares are publicly traded, and the rest are theoretically owned by the banks' depositors, though very few benefits accrue to them.

When these banks sell their remaining shares to the public, however, in a transaction known as a second-step offering, the potential upside is compelling. That is because existing shareholders don't get diluted in the deal as technically no new shares are being issued. Instead, existing shares are being released to the public markets, unlocking capital that the bank always had, according to M3 Funds' aptly-named portfolio manager Jason Stock, who recently discussed MHCs during a presentation before the Value Investing Congress in New York in mid-October.

Hudson City Bancorp (HCBK) was an MHC until it went fully public via a second-step offering in 2005. Its shares are up more than 30% since that time, and the company has the distinction of being the largest bank to not accept TARP funds. People United Financial (PBCT) announced its plan to do a second-step offering in Sept. 2006 before completing the conversion in April 2007. While its shares are essentially flat since the announcement date, the KBW Regional Banking ETF (KRE) is down about 50% over that same time period.

Seventeen MHCs have conducted second step offerings since 2005, and all but one, First Federal of Northern Michigan Bancorp Inc. (FFNM) has outperformed the SNL Thrift index since that event, according to data from SNL Financial. (The list does not include American Bancorp of New Jersey, which was sold to Investors Bancorp (ICBC) of New Jersey in May for $12.50 per share.)

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