How to Use Mutual Banks to Increase Your Returns

With the market at an all-time high, attractive investment choices with promising returns are getting difficult to find, especially for the average, non-accredited investor. This article is dedicated to an uncommon and relatively unknown investment class; mutual bank conversions. So what is a mutual conversion, and how does the process work?

A mutual bank or savings institution is a bank that is owned by its members, as opposed to a conventional bank, which is owned by shareholders. Profits from mutual banks are typically returned to members in the form of lower rates on loans and higher rates on deposits. Many of these banks are local community banks and much smaller in size than the larger banks that are more well-known, such as Chase and Wells Fargo.

The Process

Mutual banks may decide to convert to a stock institution (owned by shareholders). Stockholder owned banks are publicly traded in the markets and often range in size from large caps, like JP Morgan Chase and Bank of America, to small community banks that converted from a mutual bank to stockholder owned bank, such as Webster Bank. Mutual banks may decide to convert to a stock institution for several reasons:

  • To gain access to additional capital to expand their operations, by either opening new branches or by acquiring small community banks in its market
  • They want to be able to offer their employees stock options and stock driven incentives to retain and attract talented employees

It is important to note that not every mutual bank will convert to a stock institution, these banks will convert at the discretion of the mutual banks management. Some managers are opposed to mutual conversions because it doesn’t fit with their management style or because they don’t want the added pressure of being a public traded security. If those banks do decide to convert, though, the conversion creates an opportunity for the depositors who get the chance to purchase the bank’s shares before they go on sale to the general public in the form of an Initial Public Offering (IPO).

How Does the Average Investor Participate?

Simple. To participate in the offering, or be able to purchase the shares before they are available to the general public, you must have a deposit at that institution before the conversion date.

A deposit can consist of a checking account, savings account, certificate of deposit or any other account that is labeled a depository account. The amount needed in the account to be able to participate in the offering varies on the size of the bank. If the bank is very small, a deposit of as low as $50 may be all you need; however, if the bank is larger, say $5 or $6 billion in assets, you may need a larger deposit to participate. The smaller your balance, the less stock you may receive in the case that the offering is oversubscribed. Depending on the size of the bank and the reason for the conversion, the number of shares offered by the bank will vary. Larger institutions will typically offer more shares than smaller institutions, which means you, as the investor, have the right to purchase more shares in the offering.

Let’s use an example to illustrate.


John Appleseed has a $100 certificate of deposit as Apple Orchard Bank as of July 1, 20×1. On December 21, 20×2 Apple Orchard bank files forms with its regulators to convert from a mutual bank to a stockholder bank. As part of this process, John Appleseed is notified by the bank that the bank is converting from a mutual institution to a stock institution and that John, being a depositor at the bank, has the right to purchase shares in the offering. Included in this notification is a prospectus statement for the bank, stock purchase form and proxy voting materials.

The prospectus statement defines the number of shares offered by the bank and then the financial information related to the deal including the banks financial statements. In the terms of the prospectus, John Appleseed reads that he has the right to purchase up to 20,000 shares valued at $10 per share for a total value of $200,000.

If, after reading through the prospectus, John Appleseed thinks that an investment in Apple Orchard Bank is a good investment, John will fill out the stock ownership form indicating the amount of shares he wants to purchase (assume full amount in our example) and include a check for the value of the shares being purchased ($200,000 in this example). Once the bank receives approval by its members to complete the conversion (done through proxy voting), the bank will process the request and issue shares to John. John now owns the shares. Once the IPO occurs, John has the right to sell or hold onto those shares.

It should be noted that, if the offering is oversubscribed (a large number of depositors are requesting the full amount of shares available to them and the amount being requested is more than the amount offered in the transactions) you may not receive the full amount requested. The amount on deposit at the bank could determine the amount you are allocated in the offering.  In these instances, the bank will issue the amount determined by the stock transfer agent and return the additional funds to you with interest for any shares that you were not able to purchase.

Using the example above, if Apple Orchard Bank was oversubscribed, John Appleseed may only receive 15,000 shares instead of the full 20,000 requested because he only had a deposit of $100 compared to other individuals who had deposits of $1,000 or more. If that occurs, John will be issued 15,000 shares and a check will be returned to John for $50,000 dollars (plus interest) to account for the 5,000 shares that he was not allocated.

The graphic below shows what investors should look for in a mutual bank.

Source: Bankrate
Source: Bankrate


The mutual conversion investment is rare in that there is limited downside risk for the investor. How? Investors can use a relatively small amount of initial capital to deposit at mutual banks in anticipation of these banks going public. These initial deposits are insured by the Federal Deposit Insurance Corporation and earn interest, like at any other bank. The added kicker is that if these banks decide to go public, the depositors can participate in the offering before it goes on sale to the public and this participation right gives the investor the ability to invest a substantially larger sum of money in the offering, as noted above.

Once the stock is offered to the public, first day returns are typically in the range of 15-20%. Using our example above, John Appleseed could profit $40,000 dollars on his investment of $200,000. The real benefit here is that John Appleseed only needed a $100 initial deposit to be able to participate in that investment. Further, the $200,000 investment made in the share offering was short term, as the amount of time from the conversion date to the public offering is usually 2 to 3 months. A 20% return in 2 to 3 months is a good return for any investor in today’s market, especially for the average investor.

While uncommon, the combination of relatively high returns and low risk in mutual bank conversions has proven to be an attractive and profitable investment for many individuals, even the Average Joe!

19 thoughts on “How to Use Mutual Banks to Increase Your Returns

Add yours

  1. Wow, I’ve never heard of anything like this before. Its like getting in on an IPO without being a hedge fund or a startup employee. Do you know how often this happens? Is there a way to search for banks who are considering doing this?

    1. That’s exactly right. It happens more often than most people realize, probably because the banks are small local community banks that are typically not heard of outside their town or county. While some banks don’t allow out of state deposits (check the mutual banks’ website) others do, which allows investors to participate in future deals all over the United States. As for knowing which ones will and won’t go public, that’s a bit harder to determine. You can search the FDIC’s website for a list of mutual banks, typically the things to look for are larger banks (more assets) with a strong balance sheet as they will look to the IPO as a way to increase capital for future growth. As with all types of investments if you put enough homework in you can find trends that will likely indicate some banks that will go public in the near term.

        1. My husband and I have done one bank before. We have been researching the conversion process for a few years now and have tracked a couple of other conversions. Additionally, my father-in-law has done this about 20 times.

          We have a number of deposits spread across community banks now waiting for a future conversion. We are also currently participating in an offering. The subscription round closed a few weeks ago and we are now waiting for the stock to be issued and then listed in the next coming weeks.

  2. This looks like an interesting investment opportunity. Would this apply to credit unions as well. I have an account with BOA, but also a credit union too which I’ve had for many years.

    1. While this does apply to credit unions, it is less common, at least based on historical trends. However, with the number of mutual banks likely to decline over the next 3 to 5 years, I could see credit unions starting to convert at a higher rate. If you have some extra cash and are looking to lock it up in a saving account or CD a local mutual savings bank is a good option. Even if that specific bank never goes public you still saved money which was insured by the FDIC up to the federal limit. Hope this helps!

  3. Definitely going to be in a research rabbit hole this long weekend! This is such a cool idea and I’ve never heard ANYONE else talk about it!!

    1. Thanks so much!! I think a lot of people don’t have the patience, since it is a waiting game and you never know if/when a bank will go public. But being that we’re young, I feel it’s the best time to get involved!

  4. Interesting idea. I like the opportunity of lower cost of entry for sure. Can you comment on the 15-20% an investor should expect?. Not sure there is such a thing as a guaranteed short term rate of return so would be curious to get your thoughts on this. All in all, it is an interesting investment vehicle as opposed to your typical IPO.

    1. Unfortunately, not quite. It varies from bank to bank based on various factors, so there really is no set amount you need to have; however, the more you have, the more likely you are the get a larger allocation of shares.

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