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It is tough enough to raise capital as a troubled community bank. Try doing it as a mutually owned thrift. That is the task facing Lincoln Park Savings Bank, which is undercapitalized because of massive losses on construction loans.
December 14
Reversing a trend of the past two years, more mutual thrift companies are announcing plans to sell shares and convert to stock companies.
Analysts say a desire for capital to fuel expansion, pent-up investor demand and uncertainty about the future of the Office of Thrift Supervision, which oversees these companies, is driving the renewed appetite for conversions.
"We're seeing a lot of interest and it's definitely a trend that will continue," said Kip Weissman, a partner at Luse, Gorman, Pomerenk & Schick PC. "There are always some mutuals that will never do anything, but there will be others that kick themselves for missing this market window."
The uptick is a sign that mutual companies, along with many community banks, are trying to raise capital almost any way they can to take advantage of the growth opportunities that exist for healthy institutions, analysts said.
Though only five mutual-to-stock conversions closed last year, four conversions have been completed in 2010 and 16 more are in the pipeline, said Laurie Hunsicker, a managing director at Stifel, Nicolaus & Co. The four completed this year were standard conversions, in which mutuals sold all their stock at once.
Some mutual companies go public in steps, selling a minority of shares initially, and then the rest in a secondary offering later.
Most of the deals in the pipeline involve mutual holding companies that are taking the second step to fully convert.
"This is honestly about the third-highest second-step market since second-steps started back in the '90s," Hunsicker said.
The last peak occurred in 2007, when seven second-step conversions were completed at a median price of 102.5% of book value, the highest price paid since the early 1990s.
Second-step conversions are naturally priced higher than standard conversions, and are harder to sell in a difficult market, Weissman said. As a result, second-step conversions took a swift dive in 2008, with only one deal completed.
Yet things are turning around this year. On Dec. 18, Northwest Bancshares Inc. of Warren, Pa., completed the first second-step mutual conversion in more than 20 months.
The $7 billion-asset company raised $668 million, with a price-to-book value of 89%. Though no second-step conversions have been completed this year, 10 deals had been announced as of Feb. 25, according to data from Stifel Nicolaus.
Damon DelMonte, a research analyst at KBW Inc., said the successful Northwest offering sent a message that the investment community is willing to engage in conversion activity again.
"There are some MHCs out there, as well as mutuals, that are saying, 'Hey, if investors are supportive of transactions like this, and it's going to fit a long-term use for us to generate the capital today, then we may go ahead and try to test the waters ourselves,' " he said.
Though the prices of last year's two second-stage deals aren't close to the peak prices of 2007, Weissman said the ability to raise capital in this way is too good for thrifts to ignore in this environment.
"It's really an opportunistic situation," he said. "You would get higher pricing in another market. But the feeling is it's good to have capital."
An example is Naugatuck Valley Mutual Holding Co. in Connecticut, which announced a second-step conversion last week.
John Roman, Naugatuck's CEO, said the conversion would immediately supply capital for Naugatuck to acquire Southern Connecticut Bancorp Inc. in nearby New Haven.
"We needed additional capital to take advantage of the opportunity, and the acquisition gives us a good reason for the second step," he said in an interview. "Capital is obviously very important right now, and we might have even done this without the acquisition."
Standard conversions, in which mutuals sell off all of their stock at once, are also on the rise. Four were completed in January and six have been announced this year, compared with three completed in all of 2009.
OBA Financial Services in Germantown, Md., was one of four that completed a standard conversion last month. The others were OmniAmerican Bancorp in Fort Worth, Athens Bancshares Corp. in Tennessee, and Versailles Financial Corp. in Ohio.
David Miller, OBA's chief financial officer, said the company wanted to raise about $46 million in capital to bring new products and services to customers.
"We can open new branches, we can hire new bankers and allow them to get new customers and better customers," Miller said in an interview. "Those are the biggest opportunities."
Weissman said standard conversions are also priced much lower than they were just a few years ago, lowering the amount of capital that institutions must raise by as much as half, and in turn making it easier to digest.
A smaller offering also means fewer shareholders and less pressure on management, he added.
"It's attractive to the purchaser because it's a low price; it's attractive the seller because it's easier to control the stock because there's fewer stockholders; and it's easier to invest the proceeds," Weissman said.
Uncertainty about the future of the OTS — which could be eliminated or rolled into another regulator under proposed legislation to overhaul financial industry rules — is also driving interest, analysts said.
"I think as you look back historically, the OTS has tended to be the more user-friendly regulatory body for banks that want to go through the conversion process," DelMonte said. "I think there's some uncertainty: Are they going to prohibit me from converting? I could be stuck as a mutual or I could be stuck as an MHC. Or are they going to force me to convert when it may not be the best atmosphere to do so?"
