A number of mutual holding companies are potential candidates to launch second-step conversions, but lingering questions about the new regulatory regime could cloud the issue.

Investors Bancorp in Short Hills, N.J., often makes the list of mutual holding companies that could pursue a second-step conversion. Investors (ISBC) is ready to roll, but regulatory uncertainty is slowing things down, says Kevin Cummings, the company's chief executive.

The big question mark involves dividends; the $11.2 billion-asset company wants to pay a dividend before converting, but doing so requires regulatory approval. "It's not a matter of if we will conduct a second-step conversion, it's a matter of when," Cummings says.

"What might cause it to happen more quickly is the dividend waiver rule," he says. The company has submitted an application with the Federal Reserve Board for a waiver and is awaiting a response. "We've been very active buying our stock back and we think we should pay a dividend in anticipation of a second step."

In a dividend waiver, the mutual pays a dividend to outside shareholders but not to itself.

It is unclear how the Fed will view dividend-waiver requests, says Theodore Kovaleff, an analyst at Horwitz & Associates. It's also unclear how the Federal Deposit Insurance Corp., which retains some authority over the matter, will view such requests.

"As a regulator, they can find a reason to say you shouldn't be paying a dividend and you shouldn't waive it," says Kovaleff, who owns shares in Investors and Beneficial Mutual Bancorp (BNCL) in Philadelphia.

Cummings says regulatory changes have clouded his view of when a conversion might happen. "We're not as optimistic as when we first started the process," he says. "The Fed is not going to be as friendly as the [Office of Thrift Supervision] to the mutual holding company structure."

The Fed and the FDIC declined to comment. Cummings says that a rejection of Investors' dividend-waiver request will not cause it to cancel plans for a second-step conversion.

Regulatory concerns aside, the timing seems right for a new wave of second-step conversions, says Frank Schiraldi, an analyst at Sandler O'Neill & Partners. From January 2010 to June 2011, 20 thrifts conducted second-step conversions. The conversion market shut down last summer when worries about the economy sent banking industry stocks lower.

Provisions of the Dodd-Frank Act further muddied the picture, merging the OTS, which supervised mutual holding companies, into the Office of the Comptroller of the Currency. The law also shifted the oversight of mutuals to the Fed.

Still, market conditions seem ripe for conversions, Schiraldi says. "There are a lot of executives who want to get out of the mutual holding company structure," he says. "Now that you have stocks rebounding, and capital-raising is a bit easier, there are guys on the sidelines who will be taking a closer look at it."

Schiraldi notes that several mutuals conducted buybacks in the fourth quarter, including Investors, suggesting that management teams are trying to return capital to shareholders in advance of a conversion. Beneficial, which also repurchased stock in the fourth quarter, is also considered a likely conversion candidate, he says.

Executives at Beneficial declined to comment.

Some investors have also questioned the ability of MHCs to grow in a more costly era of banking. That has increased pressure on management teams to convert.

Kovaleff agrees that Investors and Beneficial are strong candidates for a second-step conversion, along with Clifton Savings Bancorp (CSBK) and Kearny Financial (KRNY).

Clifton, a $1.1 billion-asset mutual in Clifton, N.J., had applied for a second-step conversion, but withdrew the bid in June after the OTS assigned it a "needs to improve" rating on its Community Reinvestment Act examination.

"We're working toward that end," says Bart D'Ambra, Clifton Savings' chief operating officer. "We're waiting for our next examination in the fall" before reapplying.

Executives at Kearny, a $2.9 billion-asset mutual in Fairfield, N.J., could not be reached for comment.

Some companies may see a benefit to retaining the mutual holding company structure for a while longer.

"Some of the very small ones are probably going to remain mutual holding companies at least until some opportunity comes around," Kovaleff says. "I wouldn't be surprised to see mutual holding companies acquire other [MHCs]. You can only do that if you're still an MHC, or a mutual savings bank."

Mutuals that have struggled with capital, such as Magyar Bancorp (MGYR) in New Brunswick, N.J., could strengthen their balance sheets through conversion, says Kovaleff, who owns shares in Clifton, Kearny and Magyar.

Executives at Magyar declined to comment.

Kovaleff notes that there are about 10 MHCs that trade on the pink sheets, all with less than $190 million of assets. Those thrifts are unlikely to pursue a second-step conversion, he says.

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