My bank wants to change. Is this good or bad?
September 2, 2011 12:34 PM   Subscribe

Why is my bank becoming a stock savings bank rather than a mutual savings bank and is this a good or bad thing for me? Please assume complete, total and embarrassing financial ignorance in your reply: I know absolutely nothing, possibly less than nothing, about money, economics, banking, stocks and finance.

My bank sent out a big package of paperwork announcing that they want to convert from a mutual savings bank to a stock savings bank. Apparently I, as an account holder (I have a checking account, a savings account and a CD) am supposed to vote on the conversion. I also have an opportunity to buy stock - minimum investment, $250.

I don't understand the change here. What does it mean? What's going on? Should I be worried? Is this a sign that my bank is going under? Which way should I vote, and why? And, would some stock be a good investment? I've never bought stock before and I really can't afford to lose money but I could swing $250 going out of circulation for a year or two if it would return to me as, say, $350.
posted by mygothlaundry to Work & Money (8 answers total) 1 user marked this as a favorite
A mutual savings bank is "owned" by the account holders (members). You probably receive some form of profit distribution, but really the point of a mutual savings bank is that the bank is meant to be run for the benefit of its customers and the community. But mutuals can't raise new capital effectively, so they can't grow rapidly. And often they're not very efficiently managed because there aren't active institutional shareholders that understand and scrutinize the financial results. Mutuals often have archaic IT systems and complacent managers.

When a mutual converts to a stock bank it's called a "de-mutualization." Basically, it's a change in ownership. The bank issues shares that are usually listed on a stock exchange. Having a publicly traded stock allows for a wider base of potential investors and also allows the opportunity for the stock price to appreciate (or depreciation if the bank does poorly). Investors like de-mutualizations because there is often the opportunity to vastly improve the performance of the bank. Management is now beholden to shareholders and must maximize shareholder value. Very often a small local bank will de-mutualize so that it can be acquired by a larger regional bank, which is allowed three years after de-mutualization.

The bad news for you is that your bank is converting from a customer-focused organization to a shareholder-focused company. That might entail more fees and cost cutting, which may or may not effect you. Also, it doesn't sound like you're getting any shares in this conversion, only the right to buy upon conversion. That's probably typical for a bank like this, but sometimes members get actual shares and not just the right to buy shares.

Like I said earlier, de-mutualizations are sometimes great opportunities for investors to make money. But not always. I can't say whether this investment is right for you or not. I will say that you should avoid any offer to loan you money to buy shares.
posted by mullacc at 1:05 PM on September 2, 2011 [3 favorites]

What does it mean? What's going on?

Your bank is currently owned collectively by the depositors (i.e. you and everyone else with an account there). They will soon switch to a model where the bank will be collectively owned by shareholders who own stock. There are a bunch of laws and regulations around how this works, and part of it is the fact that you can vote on it and the fact that you can buy stock directly at the IPO price. There's more on it from the SEC here, although that article mainly focuses on fraud that can happen around these sorts of conversions.

Should I be worried? Is this a sign that my bank is going under?

You shouldn't be worried as long as you are covered with the FDIC insurance limits. Many banks went under during the recent financial crisis, and even at the worst points no one lost any of their FDIC insured money and usually there was not even any disruption to things like direct deposit transfers. Worst case scenario is that the conversion leads to changes to the bank that you don't like, and if that happens you can always just move to another bank/credit union.

Which way should I vote, and why?

It's hard to tell without knowing the specifics of your situation. They may need to raise money for some reason and see this as the most logical way to do it. Or this may be a sign that the current management are going to focus less on customer satisfaction.

And, would some stock be a good investment? I've never bought stock before and I really can't afford to lose money but I could swing $250 going out of circulation for a year or two if it would return to me as, say, $350.

You'll never, ever, get a gauranteed 40% gain over two years with no risk from owning stock. Giving the depositors the ability to buy at the IPO price is a good deal for the depositors, but there are many instances where the price goes down immediately after the IPO, and even if it goes up initially if you are talking about investing in a single stock for a year or two there will definitely be ups and downs. So if you can't afford to lose a significant amount of your $250, don't invest it. If at some point you do have extra money you want to invest, look at opening a Roth IRA and buying broad index funds, that way you have tax free returns and good diversification, which is what you want in the long run.
posted by burnmp3s at 1:13 PM on September 2, 2011

To clarify a little bit:

A mutual savings bank (or mutual bank, or mutual insurance company) is technically owned by no one other than itself in the sense that no individual persons or entities have title to the net assets of the institution or are obligated to take the first losses in the event of business failure. Deposits to a bank are liabilities of that bank, and you, as a depositor, have lent money to the institution. Provided a depositor has no more than $250,000 in deposits with an institution, if that institution fails, the depositors are covered by deposit insurance provided by the FDIC and do not lose their money. When a bank fails, the deposits are usually immediately assumed by another bank as arranged beforehand by the FDIC; accordingly, the first bank's failure is experienced "seamlessly" by its depositors apart from the need to deal with a bank with a different name.

If, however, the bank had borrowed money through some other venue and has other liabilities labeled in its financial statements as some type of loan, mortgage, advance, bond or other debt, those lending parties would not be covered by the FDIC if the institution failed. They would have to get in line as creditors to recover whatever monies they can by way of bankruptcy court proceedings.

In its conversion to stock form, your bank will issue stock to investors who then become the clear cut owners of the institution and who would, if the bank ever failed, take the first hit of losses and typically lose all of their investments. (Note: lenders to a business who hold a business' loans or bond debt take priority for restitution in bankruptcy ahead of stockholders who are almost always wiped out).

Mullac above has described some of the qualities of publicly owned stock businesses and the advantages they hold over mutual institutions when it comes to raising capital.

There is another aspect of mutual to stock conversions that appears to be little appreciated outside of banking circles: the enrichment of senior management. It is common -- if not routine -- for the executives of the converting institution to be awarded cash and equity (i.e., common stock) in the course of the conversion. Many a mediocre, small town bank executive has been "converted" to petty millionaire status through such transactions -- which is almost certainly a large part of the motivation of management to pursue such transactions. Bear in mind that, in a conversion, senior / executive management nearly always remains in place, so these awards do not serve as de facto severance payments. Management enrichment in this fashion is essentially a form of self dealing, albeit a legal one.

Now, whether you should subscribe to the offering and become a stock holder is a function of your overall level of financial resources, investment objectives, risk tolerance and investment knowledge. Regardless of how much money you might have, NEVER invest in anything you do not understand. A financial adviser can advise you better than anyone here on the Green. However, it is possible that you answered your own question by your statement, "I've never bought stock before and I really can't afford to lose money..."
posted by cool breeze at 2:41 PM on September 2, 2011 [1 favorite]

Your bank is being circled by sharks in suits. If you're happy with the service it's given you until now, vote No and encourage as many other customer/owners as you can to do likewise.
posted by flabdablet at 4:21 PM on September 2, 2011

Since everyone else has given you a pretty good overview of what's happening, I'll just follow up on flabdablet's advice with this: if your bank de-mutualizes despite your voting No (if you do), consider a credit union instead. It's not a guarantee that this sort of thing will happen again, but you're less likely to be nickel and dimed to death by them since they're not beholden to shareholders (or rather they are, but the account holders are the shareholders instead of investors from the stock market).
posted by asciident at 7:25 PM on September 2, 2011

Sorry, meant to say it's not a guarantee this sort of thing WON'T happen again. CU to (various flavors of) bank conversion is not unheard of, but I think it's somewhat rarer than de-mutualization.
posted by asciident at 7:26 PM on September 2, 2011

In any company, return on investment and voting rights are both allocated per share. If you and a small group of cronies collectively hold 51% of a company's shares, you can basically make it do whatever you like regardless of what the rest of the shareholders want. The key difference between a stock company and a mutual is that in a stock company, anybody can hold as many shares as they can afford to buy; in a mutual, every member holds exactly one share.

The credit union I've been a member of for over thirty years, modulo mergers and acquisitions, has recently made itself over as a "customer owned bank". I was furious about being addressed as "customer" rather than "member" in correspondence from them, and had a borderline-OCD exchange of mails with their development manager as a result.

He repeatedly assured me that the new name was not the first step on a slippery slope toward demutualization, against which the organization's constitution contains many strong provisions, and that the change had happened because member polling had revealed that a substantial majority of credit union members do in fact consider themselves customers rather than members and that the general public is simply not comfortable with the idea of "membership" as applied to financial institutions.

So now we're all "customer/owners", apparently. I still loathe this; I'd much rather be a member than any kind of customer, which may well say more about my own first steps on the slippery slope toward old-fogeyhood than it does about my bank.

My point is that if you're not particularly well-informed about how these things are run, you need have no fear at all of signing up as a credit union member. Doing so is functionally identical to becoming a customer of a mutually-owned bank. You end up with one share, which entitles you to attend company meetings and exercise one vote should you choose to do so, and the assurance that no tiny minority of shareholders can set bank policy in ways that put their interests ahead of yours.
posted by flabdablet at 3:49 AM on September 3, 2011

I know absolutely nothing, possibly less than nothing, about money, economics, banking, stocks and finance.

Then you really have no business being part owner in a bank, the way you own and vote in a mutual savings bank right now. I'd just look at your banking services and fees now, and compare them with what you can find elsewhere, so if anything changes you have a plan of action. It could be that your bank is undercapitalized and needs to find a bank to buy it to protect your assets, or it could be that some suits think they can make it more profitable, presumably at your expense. Either way, FDIC should protect your money under FDIC limits.

So don't bother buying stock, just keep on the look out for a better 'banking deal,' so to speak.
posted by pwnguin at 9:19 AM on September 4, 2011 [1 favorite]

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