The potential for theft is one big downside to traditional panniers. In my case since I carry a laptop I'm more worried about the contents than the panniers themselves.

I used panniers for awhile this summer. They have their advantages but the above is a big reason I prefer a backpack. If I stop someplace on the way to work my stuff comes with me without having to take the panniers off the bike.

While I wouldn't say I'm dead set on a backpack, I do like the ease of keeping my things with me as I mentioned above. Also, I ride a performance oriented bike to work and panniers sap the fun out of it.

The Arkel Bug mentioned above seems like a reasonable compromise but not being waterproof is a huge problem for me. Yes, I know you can get rain covers for them. I had covers for my panniers and if you only ride in the rain once in awhile they're fine. Otherwise, they're a PITA. The other downside to the Bug is that it looks like a pretty poor backpack for riding. I realize it's meant to be put on the rack, but the ideal for me would be able to ride with it on my back most of the time. I'd put it on the rack for extra heavy loads or longer than normal rides.

If you're looking for good ideas for a convertible pannier/backpack, you might want to take a look at how a good cycling backpack is designed. The Banjo Bros Commuter Backpack is what I use. It's not perfect and there are lots of other options of course but it has most of the features I care about at a reasonable price point.