11:07 AM EDT on Sunday, July 16, 2006

By Neil Downing / The Providence Journal

It was Friday, July 7. The Dow Jones Industrial Average dropped nearly 135 points, a loss of about 1.2 percent.

The Standard & Poor's 500 index, another closely watched market barometer, fell more than 8 points. The Nasdaq composite was off, too.

But not little Newport Bancorp. Its shares jumped by 28 percent — in just a single day. Shareholders who were fortunate enough to hold the stock before trading began that day wound up hitting the jackpot.

What happened? It had to do with the conversion of a mutual savings bank. That's something not seen around here in quite a while. But there used to be a lot of bank conversions, and some people made a lot of money off of them.

This one involved Newport Federal Savings, a 118-year-old bank on Aquidneck Island. It had been privately held, owned by its depositors.

Earlier this year, the bank decided to do a conversion: Instead of being owned directly by its depositors, the bank decided to become publicly held, owned by stockholders.

So it created a holding company, Newport Bancorp. Stock in the holding company was sold to the bank's depositors (and to employee benefit plans), at $10 a share.

That was the price of Newport Bancorp (NASDAQ:NFSB) before the opening bell sounded on July 7.

By the time the market closed that day, the stock had jumped in value by $2.80 a share, closing at $12.80.

That made Newport Bancorp the second largest percentage gainer of all the stocks traded on Nasdaq that day.

So if you had forked over $10,000 last month, to acquire 1,000 shares, your investment would have been worth $12,800 at the end of trading on July 7, the first official day of trading for Newport Bancorp stock.

Have you ever seen the likes of it? If you clear away the cobwebs, I'll bet you can remember.

There was a wave of conversions in the 1980s, especially in New England. From 1982 to 1986, for example, about 150 New England mutuals converted.

Some investors even specialized in them, said Robert E. Cusack Jr., chief investment officer at Preferred Asset Management, a money-management firm in Providence.

"There were people going around, opening up small [deposit] accounts," at mutually owned banks throughout the region, he said. "They were hoping to get some shares" if one or more of the banks decided to convert, he said.

Some did convert, some didn't. For those that did, there was money to be made, at least on paper, often on the very first day of trading.

Take New Bedford Institution for Savings. When the New Bedford, Mass., bank converted, in early 1987, its depositors were given the chance to buy the stock for about $14.38 a share. On the first day of trading, the bank's shares closed at $21. Thus, depositors saw their investment increase by almost half.

Conversion activity sharply declined in the late 1980s, after the stock market pulled back sharply. But the trend returned in the 1990s.

Remember First Federal Savings Bank of America? Depositors at the Fall River, Mass., bank were given the option to buy stock in the holding company, FirstFed America Bancorp, at $10 a share. In early 1997, on the first day of trading after conversion, the stock jumped to more than $13 a share.

The conversion movement trailed off when the bubble burst in tech stocks, dragging the overall market down with them.

There haven't been many conversions lately, Cusack said. "Most of the obvious deals got done," and there are fewer mutual banks in the marketplace, he said.

The Newport conversion is the first full standard conversion in the country this year, according to SNL Financial, a financial information firm based in Charlottesville, Va.

There were only five such conversions last year, including two in Massachusetts: Benjamin Franklin Bancorp, of Franklin (NASDAQ: BFBC) and Legacy Bancorp, of Pittsfield (NASDAQ: LEGC), said Mike Schaller, senior analyst at SNL.

Many of the banks that converted in the 1980s or 1990s have since been bought out. For example, Citizens Bank, of Providence, was bought out by Royal Bank of Scotland. New Bedford Institution for Savings was eventually gobbled up by Fleet (which later became Bank of America). FirstFed became part of Webster Bank.

Robert E. Veasey Jr., former head of the Financial Planning Association (Rhode Island chapter), a trade group for financial planners and others, said that the banking industry will continue to consolidate.

"We are living in a banking landscape of acquisitions and mergers, and I don't think we've hit critical mass," so there will be more mergers to come, said Veasey, a Certified Financial Planner practitioner.

Mutual banks typically convert to raise capital to pay for expansion, then get gobbled up, Veasey said in an interview at Sowa Financial Group in East Providence, a financial-planning and investment advisory firm.

"I like smaller, regional banks ... because they are prime targets for takeovers by midsize and larger banks," he said.

So is it a good idea to try to scout out any remaining possibilities for bank conversions, and for bank mergers? You can do it yourself, but it requires a lot of research. Then you must decide how long to wait until an acquisition occurs — if it happens, Veasey said.

Nowadays, he said, you might be better off investing in a mutual fund that focuses on the sector. Among those he mentioned are the John Hancock Regional Bank Fund and the Fidelity Select Banking Portfolio fund.

Besides, investing in a single bank may be too risky for a small investor; there are too many variables to weigh, said Cusack. These include broader factors, such as the regional economy and the direction of interest rates, as well as issues specific to an individual bank, such as its management and its earnings potential, he said.

And sometimes, conversions don't work out. One example: Eastland Financial. It was created through the conversion in the late 1980s of Eastland bank (the successor to Woonsocket Institution for Savings).

Remember Eastland? The airwaves were once filled with its jingle: "the bank that calls Rhode Island home." And it was Eastland that made that bizarre marketing decision: hiring a washed-up TV star (Mike Connors) from a second-rate detective series (Mannix) to try to drum up business.

Eastland later collapsed, leaving shareholders to harvest their tax losses.

But for one bright, shining moment 9 days ago, one bank's conversion paid off, a reminder of the more successful conversions of the '80s and '90s. The value of Newport Bancorp's stock soared in a single day, benefiting Newport Federal's depositors-turned-shareholders — and they're laughing all the way to the bank.

TODAY'S TIP: Bank conversions sometimes spark controversy — and scandal. Federal regulators have issued an advisory to investors, warning them of potential fraud.

Under one scheme, swindlers try to get depositors to act on their behalf, a violation of banking laws. (By law, depositors can't sell or transfer their priority subscription rights, or the stock itself, before the completion of a bank's conversion.)

"The rare ability for ordinary individuals to get in on the ground floor of an [initial public offering of stock] makes mutual-to-stock conversions ripe for abuse," the U.S. Securities and Exchange Commission says.

For details, read "Mutual-to-Stock Conversions: Tips for Investors," available at the SEC Web site: www.sec.gov/investor/pubs.shtml.

(Use the "Online Publications" link, then "Alphabetical Listing of Titles.")

MoneyLine correspondent Neil Downing is a staff writer for The Providence Journal in Rhode Island and author of "The New IRAs and How to Make Them Work for You." Do you have questions about your money matters? Call us at 1-401-277-7484 and leave a message, or e-mail moneyline@projo.com.

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