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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.)

Investors shrugged when Northwest Bancorp ( NWSB) announced its plans to move forward with a second-step offering in late August. However, on Sept. 10, the first trading day after the company submitted its S-1 filing with the SEC, Northwest's shares surged more than 10%. Sterne Agee analyst Mike Shafir says that's because the valuation turned out to be significantly higher than expected after an independent company went through Northwest's books to give its official assessment.

It would have required extremely detailed knowledge of Northwest Bancorp to be aware of this higher valuation, Safir says, a supposition that's in line with the theory put forth by M3 Funds' Stock, who argued during his presentation that "investors generally don't understand how to look at" MHCs.

Salt Lake City-based M3, which specializes in investing in small banks, owns several MHCs in its portfolio, Stock told the crowd in New York last month. Two holdings he highlighted are Beneficial Mutual Bancorp ( BNCL) and Fox Chase Bancorp ( FXCB).

Beneficial Mutual is one of the ten largest publicly-traded mutual holding companies by assets as well as Philadelphia's oldest bank, and Stock says it, like many old banks, has valuable real estate that it carries on its books at well below market value. Stock believes the bank is well-positioned to acquire other MHCs, not only because it is well capitalized, but because MHCs can only be acquired by other MHCs.

Acquisitions can be especially attractive for MHCs, Stock says, because the acquiring bank only has to pay for the shares that are publicly traded, enabling it to pick up more than 50% of the bank practically for free. The major added expense, which Stock characterizes as "nominal," is buying out the executives at the target company.

Joe Conners, Beneficial Mutual's CFO, declined to comment on whether the bank plans to roll up other MHCs, saying the bank's management doesn't "talk too specifically about our strategic intentions going forward." However, he notes the bank is a "highly capitalized company, giving it an opportunity to grow organically and through acquisitions."

In addition to sharing M3 Funds' favorable view on Beneficial Mutual, Sterne Agee's MHC picks include Northwest Bancorp, Investors' Bancorp ( ISBC) and TFS Financial ( TFSL), the country's largest MHC at $11 billion in assets.

Sterne Agee's Shafir says MHCs have generated little attention in recent years, but the higher-than-expected valuation afforded to Northwest Bancorp has drawn attention back to these companies, and their potential to unlock significant shareholder value through second-step offerings.

Nonetheless, Shafir cautions that investors should not blindly buy up every MHC in sight. That is because the unique capital structure puts shareholders in the minority, giving management a freer hand than is typical for public companies. In the hands of the wrong management, in other words, MHCs can be a disaster. Still, interest in MHCs looks to be far from its peak, making these companies worth a close look.

In recent action, Beneficial Mutual shares were up 6 cents to $9.28; Fox Chase Bancorp was flat; Investors' Bancorp's stock was down 3 cents to $10.73; and TFS Financial shares were off 7 cents to $11.56.

-- Written by Dan Freed in New York.

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