Mutual holding company conversion activity is experiencing a resurgence of interest, with more first-stage conversion announcements expected through the end of the year and into early 2019, according to a well-known lawyer active in the space.

Eric Luse, co-founder of Luse Gorman PC, a law firm that specializes in mutual conversions, said that a number of mutuals are planning MHC conversions as share price valuations have increased across the banking sector. In addition to two MHC conversion announcements in the next four months, Luse Gorman attorneys estimate that there will be one standard conversion announcement and two second-stage announcements.

This year already has seen two completed MHC deals, including Fair Lawn, N.J.-based Columbia Financial Inc. (MHC), which raised nearly $500 million in gross proceeds. That compares to last year's four MHC conversions, the highest tally since 2008. Additionally, three other mutuals filed MHC conversion applications in September: Wauwatosa, Wis.-based TEB Bancorp Inc.; Poughkeepsie, N.Y.-based Rhinebeck Bancorp Inc.; and Greenfield, Wis.-based 1895 Bancorp of Wisconsin Inc.

Luse attributed the MHC momentum to mutuals finally acclimating to their new regulatory environment and focusing instead on growth. He said these converting mutuals need capital for growth but do not want to go entirely public immediately. He said they either do not need the entire amount they could raise in a full conversion or would like to give younger management teams greater independence. Additionally, when bank stock valuations are high, it is easier for mutuals to raise sufficient capital in an MHC conversion without needing to go fully public.

In an MHC conversion, a company offers a minority percentage of the total shares outstanding to account-holders, with the MHC maintaining majority ownership. The process is called a first-stage conversion because the company can choose to go entirely public later in a second-stage offering. Mutuals also have the option of fully converting to stock form in one offering.

Only two MHC conversions were completed between 2009 and 2014. Luse attributed the muted activity to the substantial regulatory changes that took place as part of the Dodd-Frank Act. Federally regulated mutuals lost their regulator when the Office of Thrift Supervision was merged with the Office of the Comptroller of the Currency, and the Federal Reserve Board took over.

Mutuals converting under the Federal Reserve are markedly different from their peers that formed under the OTS. The Fed changed a long-standing practice that had allowed an MHC to waive its portion of dividends paid by the unit, allowing for higher payouts to minority shareholders. The dividends these MHCs paid made community bank stocks, many of which are thinly traded, attractive for some investors. Under the Fed, new MHCs effectively are prohibited from waiving dividends, while grandfathered MHCs may waive dividends with member approval and the non-objection of the Fed.

With the recent rebound in MHC conversion activity, Luse said, "It's a good sign for MHCs that there are many community banks still interested in the structure and raising capital." He added, "My experience is that the mutuals that have formed MHCs and sold stock have been better banks [than those that stayed mutual], and have used that capital well."

Click here for a webinar on mutual bank conversions. Click here to download a template showing the conversion pipeline, market performance of recent conversions, the valuations of mutual holding companies and the market and financial performance of current public thrifts. For a refreshable Excel template with a snapshot of key performance metrics and financials of any regulatory depository institution, click here.