Mutual holding company conversions, which all but disappeared after the financial crisis, are coming back.
A recently announced plan by Columbia Financial in Fair Lawn, N.J., to sell a 43% stake in itself for an eye-popping $492 million has punctuated the resurgence. If completed, it would be the biggest mutual holding company conversion since 2007.
To be fair, it has been a modest rebound, with five mutuals, including the $5.4 billion-asset Columbia, announcing MHC conversions this year. Still, it ranks as the most active year in nearly a decade.
A MHC conversion occurs when a depositor-owned mutual sells a minority stake to investors; its holding company retains a majority stake. In doing so, the thrift retains its mutual character and form of organization.
The appeal of a partial conversion rests in the ability to limit the size of a capital raise, industry experts said.
Capital levels can skyrocket at mutuals after a full conversion, which could produce a “pretty miniscule return on equity” for investors, said Lee Burrows, CEO of Banks Street Partners in Atlanta.
“Most financial institutions try to manage their capital as a percentage of their total asset base to around 8% or 9%,” Burrows said. A partial conversion “allows an institution to raise capital incrementally, deploy that capital and then go back to the markets as” needed.
Columbia is a case in point.
The company, which plans to use its proceeds to retire $50 million in trust-preferred securities and scout potential acquisitions, already has more than $500 million of capital. A fully subscribed offering could nearly double its equity capital-to-assets ratio to 18.5%. A full conversion, by comparison, would push the ratio to 28%.
Columbia CEO Thomas Kemley declined to comment.
MHC conversions became less frequent after 2008 because the dislocation caused by the financial crisis put a premium on bank capital. Institutions could raise large sums and put them to work almost immediately. As a result, just seven of the 82 conversions that took place between 2008 and 2013 involved mutual holding companies, Burrows said.
“Now that we have returned to a more normalized financial environment, I expect to see more mutual holding company conversions than during the difficult times,” Burrows added.
Investors’ seemingly voracious appetite for MHC conversions might be attributable to pent-up demand for initial public offerings for bank stocks, along with an ongoing bull market, said Douglas Faucette, a lawyer at Locke Lord in Washington who represented PDL Community, in Bronx, N.Y., its recently closed MHC conversion.
“A rising tide lifts all boats,” Faucette said, adding that he believes the same factors could convince newly minted mutual holding companies to later pursue second-step conversions, where they become completely shareholder owned.
Indeed, most mutual holdings companies have ultimately pursued second-step conversions, reducing the already dwindling ranks of mutuals.
Despite those outcomes, mutuals, frustrated by the absence of any regulatory relief efforts aimed specifically at addressing their problems, value the MHC option, Faucette said.
“It’s the single most effective capital raising alternative in the history of mutuality,” he said.
If recent conversions are an indicator, investors will likely snap up the maximum number of shares Columbia is offering. The company could sell up to 49.8 million shares at $10 each.
Each of the four offerings that closed this year sold out at the maximum level.
PDL Community, which offered a maximum 8.3 million shares in its September conversion, actually received investor orders for more than 22 million shares.
“The market reaction has been pretty strong,” Faucette said. “We were significantly oversubscribed, even though we went out of our way to point out the drawbacks” in the registration statement.