In February this year, I wrote Potential Bargains In A Niche Corner Of The US Stock Market where I discussed thrift conversions and why they could be potential bargains. In the article, my focus was mostly on thrifts that have undergone the standard conversion, or the second-step of the two-step conversion process. This was because I thought that only such thrifts could be acquired and most of a thrift’s economic value gets unlocked for shareholders when it is acquired.
Earlier today, courtesy of an article from the experienced US-community-bank investor Phil Timyan, and after more investigation, I learnt that thrifts that have undergone just the first-step conversion process can also be acquired in what’s known as a remutualisation. In this article you’re reading now, I will attempt to explain first-step conversions and remutualisations – and their potential for generating good returns for shareholders – by using Rhinebeck Bancorp (NASDAQ: RBKB) as an example. Rhinebeck Bancorp, which from here on will be referred to as RBKB, was also the subject of the Phil Timyan article I mentioned.
How a first-step conversion works:
- RBKB is a public-listed company that owns 100% of Rhinebeck Bank. Rhinebeck Bank is the operating bank that was established in 1860.
- 57.1% of RBKB is owned by Rhinebeck Bancorp MHC. Rhinebeck Bancorp MHC is a non-stock corporation, so it has no shareholders. 42.9% of RBKB is owned by public shareholders.
- In January 2019, Rhinebeck Bank completed its first-step conversion process. During the conversion process, 4,787,315 shares of RBKB were sold. Crucially, 6,345,975 shares were also issued to Rhinebeck Bancorp MHC but these shares were never sold, and Rhinebeck Bancorp MHC has no shareholders, as mentioned earlier.
- Effectively, the 6,345,975 shares of RBKB held by Rhinebeck Bancorp MHC are not trading and can’t claim the economics of Rhinebeck Bank until Rhinebeck Bancorp MHC chooses to convert from its mutual ownership structure to one where it also has stockholders; this is known as the second-step conversion.
How a remutualisation works:
- A remutualisation occurs when RBKB is acquired by another mutual bank. What happens at the point of acquisition is that the shares of RBKB owned by Rhinebeck Bancorp MHC gets cancelled, so 100% of the economics of Rhinebeck Bank then belongs to shareholders of RBKB, instead of the initial 42.9%.
- As of 31 March 2025, RBKB has total shares outstanding of 11,094,828. After deducting 6,345,975 shares of RBKB owned by Rhinebeck Bancorp MHC and 302,784 shares of RBKB from unearned ESOP (employee stock ownership plan) shares, the remaining shares of RBKB that will be left in a remutualisation is 4,446,069.
- As of 31 March 2025, RBKB’s stockholders’ equity is US$125.975 million. RBKB’s stock price is US$12.12 as of 12 June 2025. If the acquiring mutual bank decides to pay, say, US$20 per share for RBKB, it only has to cough up US$88.921 million (US$20 multiplied by 4,446,069 shares) for US$125.975 million in stockholders’ equity. So both the acquiring mutual bank and existing shareholders of RBKB win big.
- On the surface, RBKB has a book value per share of US$11.35 (US$125.975 million divided by 11,094,828 shares), which gives it a PB ratio of 1.06. But if the remutualisation math is used, RBKB’s true book value per share is US$28.33 (US$125.975 million divided by 4,446,069 shares), which gives it a PB ratio of just 0.43.
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