How to Rob a Bank

Kiplinger's Personal Finance Magazine, Dec, 1998 by Kimberly Lankford

Here's an investor's dream--a 67% return in one day, with no brokers' fees, on the stock of a tiny local company. Sound like a scam? It wasn't for Michael Anselmo. The Livingston, N.J., man bought Staten Island Bancorp shares at $12 each and watched the price shoot to $20 on the first day of trading. Then he did it again two months later, buying Richmond County Financial at $10 per share. Its price jumped to $16.50 on the first day and hit $20 a month later.

Anselmo's secret: As a savings-and-loan depositor, he was eligible to buy into the thrifts' initial public stock offerings before the rest of the world.

Most s&l's start out as mutual thrifts, which are owned by their depositors rather than investors. When a mutual thrift goes public, depositors receive subscription rights to the IPO, which allows them to buy shares at a discount from book value (the company's assets minus liabilities). The price usually jumps quickly--for the 32 mutual thrifts that converted to stock companies in the first half of 1998, an average of 43% the first day, according to SNL Securities, of Charlottesville, Va., which tracks thrifts.

These huge IPO returns aren't just a coincidence. They're driven by financial realities. Most companies use IPOs as a way for original investors to cash out. But thrift owners--the depositors--don't get any payoff except the right to buy shares. The money they pay for shares is immediately added to the company's book value.

David Winton, a thrift analyst for bank consultants Keefe, Bruyette & Woods, says depositors at most of the publicly owned thrifts he follows were offered shares at 75% to 85% of the post-IPO book value. Share prices then jumped to 110% to 125% of book value within a couple of months. "You're getting your share of the equity plus the price you paid, so you're kind of getting your money back," says Chris Smith, who monitors thrift conversions for SNL Securities. If the s&l is bought out in a merger, the share price may rise to 150% to 200% of book value, says Robert Bowes, manager of Bowes Bank & Insurance fund, which has invested 5% of its assets in 110 mutual-thrift accounts in the hope of getting in on their IPOs.

More than 440 mutual thrifts have gone public since 1992, usually to raise capital, make acquisitions or be acquired. Smith expects the remaining 840 mutual thrifts in the U.S. to convert within the next five to ten years, as long as the thrift laws don't change. And you can share in this bounty (see the box on the next page for prospects).

HOW TO GET IN

All you need to do is open an account at a mutual thrift. Call savings and loans (many have "savings bank" in their names) and ask if they're mutually owned and will accept your deposit. Start with those in your area--less than one-fourth of the mutual thrifts accept deposits from people who live out of state, according to SNL Securities. Even fewer accept deposits by mail.

Depositing just $50 to $100 into an s&l may enable you to buy hundreds of thousands of dollars' worth of shares at the IPO, depending on the number of other interested depositors. But the competition is stiffer than it was in the past. After years of reading s&l success stories and listening to former Fidelity Magellan fund manager Peter Lynch tout the strategy, many s&l depositors are jumping at the chance to buy the discounted shares. Twelve of the 16 thrifts that went public in the first quarter of 1998 were oversubscribed, which means depositors wanted more shares than were available.

When an IPO is oversubscribed, you may be able to buy shares only if you've had an account for more than a yeah, and the number of shares may be based on the size of your account. For example, so many depositors wanted to buy shares in Cavalry Bancorp of Murfreesboro, Tenn., which went public in March, that a depositor with a $100 account could buy only about 44 shares. The price jumped 106% on the first day of trading.

Anselmo had the same problem with Richmond County Financial. Nearby Staten Island Bancorp had just gone public in December 1997, and jumped 67% on its opening day of trading on the New York Stock Exchange. So the memory was still fresh in investors' minds when Richmond announced plans to go public in February. "Everybody and their mother bought it," says Anselmo, who wasn't allowed to buy as many shares as he wanted.

Because of their popularity, some thrift IPOs aren't being offered at the discounts they once were--now they're often 80% of book value or higher, says Martin Friedman, thrift analyst and vice-president of Friedman Billings Ramsey, an investment-banking firm in Rosslyn, Va. "People think this is easy money, and it was six months ago, but times have changed," he says. "Investors need to be very careful what they're buying today."

Ninety-two percent of the thrifts that have gone public since 1992 were selling above their opening prices a month alter their IPOs, according to SNL Securities. But they can't all sustain those levels. For example, Anselmo sold his Staten Island Bancorp shares at $20 a few months after he bought them at $12. The price rose to a high of $24, then fell to $15. His $10 shares of Richmond County Financial now trade at $13. "You can't just blindly throw money at a thrift and assume that there's going to be a 50% upside," says Winton.