The mutual holding company is on a pace to disappear, following the lead of its biggest ally, the Office of Thrift Supervision.
The universe of hybrid mutuals — banks owned in part by shareholders but mostly by a mutual holding company — began shrinking last year as concerns grew over a new regulator and a prospective need for more capital. The trend is showing no sign of slowing this year, which begins with 61 MHCs remaining and analysts expecting the category to fade away.
"I would anticipate that, over the course of the next two years, a significant percentage of those institutions will eventually become fully public," said Matthew Kelley, an analyst at Sterne, Agee & Leach Inc.
After nearly a two-year lull, mutual holding company conversions began picking up in early 2010 as dozens of companies planned for a possible switch. By yearend 12 MHCs had taken the second step to convert to fully public companies, compared to just two in 2009 and one in 2008, according to data from SNL Financial in Charlottesville, Va.
At least seven others have applied to convert, and one more conversion has begun and is set to close next month. Analysts said at least 10 more are in the pipeline.
"Between them converting and fewer mutuals deciding to take the MHC form, yes, we will see fewer numbers of MHCs in the next year or two," said Collyn Gilbert, an analyst at Stifel, Nicolaus & Co.
Historically, second-step conversions have helped thrifts ease into public ownership, raising a manageable amount of capital yet maintaining control. As a result, MHCs tend to trade at large discounts to book value, creating huge opportunities for investors, Kelley said. MHCs tend to pay higher dividends, and have "massively outperformed" other community banks in the past, he said.
Analysts also said the disappearance of MHCs is another example that the line between thrifts and banks continues to blur.
A quest for capital will continue to lead to more convsersions, Gilbert said, whether to cushion balance sheets or fund growth. Companies are also concerned about how a new regulator, the Office of the Comptroller of the Currency, may change the conversion rules.
Analysts said the prime conversion candidates are MHCs with more than $1 billion of assets. Twelve remain, including Third Federal Investors Bancorp in Short Hills, N.J.; Beneficial Mutual Bancorp in Philadelphia; Kearny Financial Corp. in Fairfield, N.J., and Northfield Bancorp Inc. in Avenel, N.J.
"For many of those, it's for the growth capital that's needed to continue to support their business," Kelley said.
Though several companies, including Third Federal and Beneficial, have said they have no plan to convert, others have expressed some interest.
The $2.1 billion-asset Northfield, for example, tried to convert last summer but withdrew its offering due to a lack of interest, and the $1.6 billion-asset Rockville Financial Inc. in Vernon, Conn., has begun converting.
The most recent conversion was completed Dec. 21, when Capitol Federal Financial Inc., the third-largest MHC, raised $1.2 billion and scrapped the mutual structure.
While the offering was delayed once when Capitol Federal failed to sell enough shares, shares soared 16.5% on its first day of trading after the conversion.
The Capitol Federal offering is likely to boost the overall conversion market, which had declined some last summer, said Damon DelMonte, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc.
Companies had a harder time selling stock. But interest rebounded by yearend; six second-step offerings were completed in December. "I expect more conversions to continue to happen," DelMonte said.
Much of that activity would include standard conversions, which picked up in 2010. Some companies opt to go public all at once in what is known as a standard conversion, while others go public in steps.
The two-step conversion process lets companies raise a little bit of capital at a time — though not more than they have use for — and allows the board to maintain control. Mutual holding companies are also able to buy other mutuals, something that a fully converted thrift could not do.
Despite those benefits, the attitude toward MHCs in the investment community has changed in recent years due to the lackluster pricing of recently offered shares, said Theodore Kovaleff, an analyst at Horwitz and Associates. Shareholders of mutual holding companies generally get higher dividends, which is unlikely to continue under the OCC, he said.
Analysts expect more companies to go public all at once. Twelve companies went that route last year, such as Wolverine Bancorp Inc. in Midland, Mich.; SP Bancorp Inc. in Plano, Texas; and Madison Bancorp Inc. in Baltimore.
By contrast, the $345.7 million-asset Oconee Federal Financial in Seneca, S.C., was the only company that took the first step toward conversion into a mutual holding company.
"It just doesn't strike me that — absent a conversion from a credit union into a mutual — something will cause a new entrant into the mutual banking market," said Jeff Hare, a lawyer at DLA Piper in Washington. "It's a dying breed."