Mutual Conversions Could Stage Comeback in 2013

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Conditions are ripe for a comeback in mutual conversions, though it remains unclear how many thrifts will take the plunge.

Only 13 mutual thrifts pursued conversions last year, the lowest annual total since 2009, according to SNL Financial. The totals include full conversions to stock-owned companies, partial conversions, and the creation of mutual holding companies. In comparison, 20 thrifts converted in 2011.

Slowly improving capital markets could spur a "substantial increase" in conversions, says Ron Riggins, a consultant at RP Financial in Arlington, Va. Several mutually owned thrifts are looking at converting this year "because of the accretive benefits of raising capital," he says.

Macon Bancorp in Franklin, N.C., is among the institutions weighing its options. The $789 million-asset mutual pulled its conversion plan in November 2011 because of adverse market conditions. Macon could re-launch its conversion plan later this year, says Roger Plemens, the mutual's president and chief executive.

"We continue to monitor the need for capital," Plemens says. "We've got all the trends moving in the right direction."

At Sept. 30, Macon's bank had a total risk-based capital ratio of 11.4%. Regulators consider 10% as the threshold for being well capitalized. But higher capital levels could become a necessity for Macon if proposed Basel III requirements are implemented.

"That's what Basel III might do to us," Plemens says.

Industry observers have pegged several other mutual thrifts as candidates for conversions in 2013: Beneficial Mutual Bancorp (BNCL) in Philadelphia; Clifton Savings Bancorp (CSBK) in Clifton, N.J.; Kearny Financial (KRNY) in Fairfield, N.J.; and Investors Bancorp (ISBC) in Short Hills, N.J.

Investors is leaning toward a second-step conversion in 2013, Kevin Cummings, the company's president and chief executive, told American Banker in December. "We've leveraged our capital down below 8% and hit our return-on-equity targets," he said, explaining some of the reasons to convert.

The Federal Reserve Board has recently approved dividend waivers for several mutuals, which could help more institutions decide to convert. Uncertainty about the Fed's position on the waivers, which frequently serve as a precursor to a conversion, had led some mutuals to postpone converting.

Still, not everyone is convinced that a new wave of conversions is coming. Some industry observers believe that the recent downward trend is a permanent one because most mutuals have no immediate need for extra capital.

Upwards of 95% of all mutual thrifts have adequate capital, says Jim Fleischer, a lawyer at Silver, Freedman & Taff. That should reduce the number of thrifts looking to convert because access to capital is the main benefit of converting, he says. "For mutuals that don't need capital — and that's most of them — they would have become stock companies a long time ago," he says.

When a mutual converts, it is often because its leaders are nearing retirement but are uncomfortable turning over the reins.

"Usually you'll find a board or executive management getting older, and they say, 'Our bench isn't strong,'" Fleischer says. "If management thinks they don't have a new team that they're comfortable with …they'll look to go public and open it up to professional managers."

Mutuals that want to pursue acquisitions also have a regulatory disincentive for converting. Once a mutual completes a second-step conversion, it is legally barred from buying another mutual. At least two dozen mutuals are nearing a key anniversary where they can entertain offers from potential acquirers.

Still, some mutuals are willing to convert because there is less fear of the unknown, especially when dealing with the Dodd-Frank Act, says Kip Weissman, a lawyer at Luse Gorman Pomerenk & Schick.

"Clearly, it's time-consuming to be" a company that reports to the Securities and Exchange Commission," Weissman adds. "But at least the uncertainty has dissipated a little."

An ever-shrinking pool of mutuals may also lead to more conversions, Weissman says. That's because the option of merging with another mutual is less likely to materialize, and converting is the next-best way to raise capital levels.

"Capital is king, for better or worse," Weissman says.

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