How to Invest in Thrift Conversions

by Ben Taylor

A thrift institution -- or "thrift" -- is a type of bank or credit union that is owned by its depositors. The process of converting a thrift bank from private to public ownership is called a thrift conversion. Before going public, a thrift has its value appraised, then sets its initial public offering (IPO) price within 15 percent above or below its appraisal value, according to research by Russ Kashian and Kristen Monaco. If the institution's directors set the IPO price less than its book value, they create an opportunity for investors to acquire shares of the thrift at a discount. Since bank stocks tend to gravitate toward their book value over time, thrifts are a low-risk investment with a potentially high payoff.

1. Locate thrift institutions that are planning to convert from private to public ownership. Financial research firms, such as SNL Financial, publish lists of thrift institutions for clients who pay a yearly fee, but you can also consult a state's department of banking for a list of thrift institutions. Estimates of a thrift's value are based on available data and investor liquidity, according to Kashian and Monaco, as well as by valuating similar institutions.

2. Study the types of financial activities the thrift is involved in, then compare it to similar institutions. Investors can prognosticate the thrift's future market value and performance by monitoring the performance of similar firms that are already public, according to Kashian and Monaco. Since the IPO proceeds are combined with the institution's existing net worth rather than paid to managers, according to the Federal Deposit Insurance Corporation (FDIC), the IPO proceeds will support the firm's financial activities and likely increase revenues.

3. Open an account with the thrift institutions in which you want to invest. Because demand for thrift conversions is high, holding an account with the thrift institution is an expedient way to get to the front of the line when the thrift begins issuing stock. Many thrifts require depositors to have held an account at the institution for a waiting period, usually one year, before the conversion; if you cannot meet the required holding period, purchase shares as part of the thrift's IPO if they are available.

4. Hold the shares for the required waiting period, then analyze the thrift's performance over time to decide whether to keep your shares or sell them. Plan to invest in a thrift conversion for at least a year because, once it has been issued, newly-public thrift stock cannot be sold for three years and the thrift cannot buy it back for one year.

Items you will need

  • List of thrift institutions
  • Thrift institution deposit account

About the Author

Ben Taylor has been writing since 2005 and has had work published by WEKU-FM and West Virginia Public Broadcasting both on air and online. Taylor holds a Master of Arts in English from Eastern Kentucky University and currently teaches composition and ESL there.