Less than a year after converting from a credit union to a mutual thrift, ViewPoint Financial Group in Plano, Tex., went public in October at $10 a share.
On its first day of trading the stock shot up 50%, and by yearend it was trading at $16.94 a share, or 69% above the initial offering.
That rise helps explain why mutual-to-stock conversions are attracting more interest these days from hedge funds, mutual funds, and other large investors.
Though stocks of converting mutuals often rise quickly after an initial public offering, they have historically attracted a "bank-specific investor" who took the time to understand what can be complex transactions, said Collyn B. Gilbert, an analyst at BankAtlantic Bancorp Inc.'s Ryan Beck & Co. Inc.
But analysts and investors say that the potential payoff - and the buzz over a few large offerings - has caught the attention of more institutional investors in the last year or so, and that many now are getting in on offerings on or before the first day of trading.
"It's a function of investors chasing value," Ms. Gilbert said.
The increasing investor interest has helped fuel the recent deal flow, and if that interest continues, it could help sustain the rate of conversions, she said.
"How much these companies raise is a function of investor interest," Ms. Gilbert said. "And with a stronger after-market for these conversions, that ultimately raises the appraisal values for the next deal."
Theodore Kovaleff, an analyst at Sky Capital LLC in New York, who also invests in the stocks of converted mutuals, said that he does not believe investment trends are a factor in the deal flow, and that each mutual has its own specific reasons for going public. However, he also said interest from large investors could affect prices.
"Clearly, if nonspecific funds are getting into bank stocks, it's a new actor in the drama," he said. "If there's more money chasing the same number of stocks, the price is going to go up."
Most institutional investors contacted for this story said they were not interested in sharing their investment strategies. But one portfolio manager for a large mutual fund, who asked not to be identified, confirmed that funds like his are taking more of an interest in the stocks of converting mutuals these days, for the simple reason that the stocks generally perform well.
Mr. Kovaleff said that he believes institutions are interested in only the largest conversions. In general, statistics show, the largest converted mutuals tend to have the highest percentage of institutional ownership.
However, John Stein, the president of the Cincinnati private-equity firm Financial Stocks Inc. and a longtime investor in converting mutuals, said that more institutions are getting in on smaller offerings. "There used to be just a small pool of institutional investors who would buy these stocks," Mr. Stein said. "There are many more investors now."
One result of the growing investor interest is "a better market" for the stocks, he said. "Smaller mutual conversions flew under the radar screen before. That's much less so the case today."
The conversions come in three different types: standard, mutual holding company, and second step. In a standard conversion, which is more the exception than the rule these days, a mutual savings bank converts to a fully public company with a single offering.
More often the conversion happens in two steps. In a first-step offering, a mutual holding company formed by the thrift retains a majority of its stock, but up to 49% of the shares may be sold to the public. The thrift would become fully public only if it goes on to sell the rest of its stock in a second-step offering, usually several years later.
Bankers and analysts agreed that the $33.6 billion-asset Hudson City Bancorp Inc. of Paramus, N.J. - which, in June 2005, conducted the largest second-step offering in the banking sector so far - helped attract some of the new investors to the conversion market. Hudson City sold its majority stake to raise $3.93 billion.
Lisa Schultz, an executive vice president and co-head of capital markets at Ryan Beck, said Hudson City prompted large investors in particular to take an interest in conversions for the first time.
"We really saw a change with the Hudson City transaction. We saw a much wider investor base participate. Now that they have done so, some of those larger institutions are even willing to look at some of the smaller transactions," she said.
Most, large investors would look only at offerings of a certain size, she said; some might look at IPOs as low as $100 million, but others will not go below $500 million or $1 billion.
Damon DelMonte, an analyst with KBW Inc.'s Keefe, Bruyette & Woods Inc., agreed that interest in converting mutuals is growing.
"This has been kind of a hidden gem for a while in the investor community. Now I think the word has gotten out there," he said. "Investing in these conversions has been very beneficial to investors over the long term, and people are always looking for new investment ideas."
Analysts say the pipeline for mutual stock offerings looks robust for this year, and is helping to sustain that interest.
With at least 10 mutual stock offerings in the works, several analysts said they have been spending a lot more time lately explaining the pros and cons of investing in mutuals.
"As we head into '07, I would say the pipeline looks solid," said Matthew Kelley, an analyst with Sterne, Agee & Leach Inc. "I would expect to see more second-step announcements as we proceed through the second half of '07."
Mr. DelMonte said he anticipates about six offerings will get done this quarter.
The conversion market seemed to cool a year ago, but the pace picked up in the second half of last year. After three deals in the first quarter and three in the second quarter, 11 more got done from July through November. Another five companies closed offerings in December, although the shares of all but one had not started trading as of Tuesday.
Among the most highly anticipated conversions: People's United Financial Inc., the Bridgeport, Conn., holding company for the $10.6 billion-asset People's Bank, has a second step in the works; and the $2.4 billion-asset Beneficial Mutual Savings Bank in Philadelphia, is going the mutual holding company route and will use the bulk of the proceeds for an acquisition.
Of the 45 mutual conversions that took place from January 2005 through December 2006, the stocks of 10 companies either fell on the first day of trading or stayed at the same price.
Mr. DelMonte said even some of the stocks that floundered after their initial offering picked up momentum later. He cited a first-step offering in October 2005 from Investors Bancorp Inc. in Short Hills, N.J., as an example.
Like most converting thrifts, Investors offered its shares at $10 each. "They came out at just a horrible time for the market, and on day one the stock ends up closing at $10.07 - which, when you look at the valuation of the company, it was at a severe discount to where it should be," Mr. DelMonte said. "I think it just took a little time for investors to see that. If you look at the stock today, it's north of $15." It closed Friday at $15.73. "So although there was no pop on day one, you still have over a 55% return on a 14-month investment."
Mr. Kelley said that investors generally can expect a decent first-day "pop" with thrift IPOs. The standard conversions generally experience the largest jumps on the first day of trading, compared to the companies that did first-step or second-step stock offerings, he said.
Among mutual companies that did standard conversions in 2005, the stock price shot up a median of 20% on the first day of trading. BankFinancial Corp. in Burr Ridge, Ill., had the largest one-day gain, 36%.
Two thrift companies did full conversions last year - Newport Bancorp Inc. in Rhode Island, whose stock jumped 28% on the first day of trading, and Chicopee Bancorp Inc. in Massachusetts, whose stock rose almost 45%.
Mr. Kelley said the second-step conversions tend to have less of a price pop on the first day, partly because of a run-up in the stock price beforehand.
"On all of the second-step conversions, there is a very significant outperformance of shares leading up to that point," he said. "If you own mutual holding company stocks, you own them in anticipation of the second-step event."
Mr. DelMonte agreed. A report he co-authored Dec. 12 touts buying mutual holding company stocks in hope of a second-step conversion as "a good investment idea." Since 2001 the average mutual holding company's stock has risen nearly 20% after a second-step announcement, he said.
Ryan Beck's Ms. Gilbert said the recent interest in conversions has been more about relative value than the initial stock pop, which used to be the main attraction. Compared with the valuations of mature thrifts and banks, the initial pricing of all three types of conversions is "very attractive."
The median ratio of price to tangible book value for conversions as a group is 41.6% of the median for the banking industry overall, according to Ryan Beck. This discount, which is "highly valuable to current investors," is often a result of excess capital generated by the conversion and the resulting subpar returns, the firm said in a Nov. 8 report.
With bank valuations at historical highs, investors are chasing value-oriented ideas as well as capital-rich institutions, the report said. "Given this focus, thrift conversions are becoming more and more attractive investment alternatives, in our view."
Ms. Gilbert said the potential for merger and acquisitions also remains a key driver in the attractiveness of the stocks. On average the price-to-book ratio doubles from the time of the IPO to the day the company announces a deal to sell itself, according to Ryan Beck.
And of the 231 companies that have completed standard and second-step conversions since January 1996, 145 of the companies, or 57%, later sold themselves, and 54% of the sellers did so within four years, according to Ryan Beck statistics.
Ms. Gilbert said there is more potential for M&A activity - which should, in turn, continue to fuel investor interest - in the coming year, because an increasing number of converted thrifts are approaching their IPO anniversary dates.
