Thin margins, uncertainty about the path of interest rates, and a rapidly dimming housing market have done little to dampen the pace of mutual-to-stock conversions this year.
Though the number of deals is nowhere near the frenetic pace of the mid-1990s, the rebound that followed the moribund years of 2000 through 2003 is holding steady.
Market professionals said the conversations in boardrooms of thrifts mulling conversions generally have not centered on macroeconomic factors, which on the periphery would seemingly discourage them. Neither have they focused on the relatively attractive valuations that the market is currently supporting, which would weigh in favor of conversion.
According to the professionals, what drives decisions is much more fundamental.
"It's a concern about how you grow a community bank or thrift," said Ben Plotkin, the chairman and chief executive of BankAtlantic Bancorp Inc.'s Ryan Beck & Co. Inc. "The rapid slowdown in organic deposit growth has made it clearer to many mutuals that they have to be part of the merger and acquisition game - that they have to both build and buy, and to do that, you have to have public currency or access to capital."
The pipeline of converting institutions has increased over the past six months, he said.
Though this year's conversions will likely fall short of last year's total of 27, the research firm SNL Financial LC said there have been 13 deals so far this year, and another 16 companies are in the process of converting. About half of them are likely to make it to market before the year closes, SNL said.
The types of conversions have been mixed. Most converting thrifts are choosing to become mutual holding companies, though some are opting for full conversions.
Also included in the SNL data are mutual holding companies that have opted to take the "second step" and become 100% stock-owned institutions. The largest deal in the pipeline, by far, is People's Bank's second step, announced last month, that observers said could raise as much as $3.4 billion. People's, of Bridgeport, Conn., has not said when it would close that offering but it is likely to be completed early next year.
Patricia McJoynt, a managing director at Keefe, Bruyette & Woods Inc., said the pace seems sustainable. Her firm's conversion calendar is busy through the middle of next year, and it continues to discuss possible conversions late next year with some clients.
"The liability side of the balance sheet - the funding - is the biggest challenge," she said. "The capital can help you with that, or you can build a war chest to acquire."
Funding problems are less a product of interest rates than they are a result of a competitive squeeze. Large banks have rededicated themselves to consumer depositors to protect and increase market share, and a new wave of financial companies are rushing high-yield online accounts to market.
Though converting to stock form can help mutuals combat competition, it also can signal capitulation by thrift company directors and executives, Mr. Plotkin said.
"Perhaps they have made the decision that they can't remain relevant," he said. "If they are going to exit someday, being public is the way to do that."
Once a community bank in a market converts, the decision frequently proves contagious. Community banks, ever mindful of their competitors, get a first-hand opportunity to witness the salutary effects of converting. In addition to needed growth capital, the process tends to be a boon for investors, including executives and directors.
Michael Godby, a conversion specialist with FIG Partners LLC, said the Philadelphia area - once not considered hot territory for conversions - has spawned five in the past couple of years.
It is a pattern that has repeated itself in other markets, he said. "The investment bankers are in town. The attorneys are in town. They are knocking on doors, and the next thing you know, you've got another conversion."
The conversion market has been surprisingly tenacious, and deals continue to come to market despite regular predictions that the well will dry up soon. SNL estimates that there are 750 mutual thrifts left - many of which have shown no interest in abandoning mutuality.
"Our in-house rule is a third will go, a third might go, and a third will never go," Ms. McJoynt said.
Still, the pool of conversion candidates might not be as limited as that math suggests. The primary factor holding back the "mights" and the "nevers" is answering to a new constituency - shareholders.
But a number of institutions have found that a half step, the mutual holding company structure, effectively insulates them from shareholder grousing. That these conversions are expected to outpace full conversions for the third year in a row may be evidence that once-reluctant mutuals are convinced that the structure can give them the best of both worlds.
"We have die-hard mutuals that just converted in the past three years because of the mutual holding company structure - guys that were never, ever going to convert," Mr. Godby said.
Almost 20 former credit unions have issued stock with the mutual savings bank charter as an interim step before converting to stock form, and investors and investment bankers said credit unions could replenish the conversion pool.
"There are a lot of very large credit unions that right now have no access to capital, and to the extent that they want to grow - and pay taxes - they could convert to the structure," Ms. McJoynt said.
