Don't forget that the Reformation itself was the product of (former) members of the Catholic church, who originally wanted to restore it to what they perceived to be its original state - almost any Catholic that thought reforms were necessary was a potential Protestant.

Paganism in the Baltics had been subdued, if not eradicated by the 14th-15th century (the last Pagan polity to convert was Lithuania in 1387). However, the Teutonic Order remained. Stripped of its purpose, it instead embroiled itself in a series of wars with their Christian neighbours, in particular Poland, mostly over what would later become western Prussia. While this went well for a while, the Order would reach its zenith around 1400. After several catastrophic defeats (the famous 1st Battle of Tannenberg included) suffered against the emerging Poland-Lithuania, the Order was forced to sign the 1st Treaty of Thorn in 1411, which, while it caused no territorial losses per se, would cripple the Teutonic Knights for years to come due to massive amounts of silver they had to pay in ransoms and war indemnities, in addition to rebuilding their lands. To that end, they raised taxes, which didn't lie well with the wealthy cities, which resented the additional levy put upon them.

Enter the Prussian Confederation. The Confederation was a league formed in 1440 by the wealthy trading ports that flourished while under the Knights' protection (seriously, the Hansa bloody loved them some Teutonic Order), with the added support of discontent nobles from western Prussia who wanted to abandon the Knights in favour of the Polish king. In 1454, it rose against their overlord and request aid from Poland-Lithuania. The still-reeling Order was defeated once more and was forced to sign the 2nd Peace of Thorn, transferring most of western Prussia to Poland (where it was to be autonomous and held further privileges like German being the administrative language) while the eastern part was to be held enfeoffed to the Order by the Polish Crown.

Neither the Knights nor the Emperor or the Pope acknowledged the latter to be legitimate and in fact, with the support of those two, the Order was able to stave off Polish encroachment for a while. However, when Emperor Maximilian I. attempted to ingratiate himself to the Poles, support for the Order was dropped. Grandmaster Johann von Tiefen attempted to counteract this by proposing to elect the offspring of reigning German princes after his death, the first being Friedrich von Wettin, son of the Saxon Elector, who started a rigorous reform programme in an attempt to solidify the dysfunctional remnant of the Order. This, however, led to it to slowly start to drift from being a monastic state to more of a "common" territorial one.

The last Grandmaster of the Order, Albrecht von Hohenzollern-Ansbach, also nephew of the then-current Polish king, then tried to rebuke the 2nd Treaty of Thorn, first legally on the Reichstag in and then militarily. While for a short time he, with the help of mercenaries, did manage to beat the Polish army back to the Vistula around 1520, the lack of a decisive victory caused the war to fuzz out into futile sieges, leading the mercenary army to disband after failing to take Danzig. Finally, Emperor Karl V. and the king of Bohemia intervened in 1521 and brokered an armistice.

During the armistice it became clear that the Order would not receive enough help to survive in its current state. The Polish side swayed between advocating for complete abolition of the monastic state to simply secularising it instead. Albrecht himself however had a meeting with Martin Luther, who attempted to convince him to completely abandon the monastic structure of his order and turn what was to be Prussia into a secular Protestant polity instead.

Albrecht abolished the Prussian branch of the Order and signed the 1525 Treaty of Krakow with the Polish crown, finally acknowledging it as the overlord over the newly formed Duchy of Prussia, with him as the (Protestant) duke. The Knights continued to exist, but not as a territorial entity, instead owning land inside the territories of other polities. In fact, there is a former Kommende like 100m away from where I'm typing this, distinctly outside of what was considered part of the TO state, and which was in the possession of what remained of the Order until about 1810.

tl;dr: The Order reformed its structure in order to counteract the decline caused by several losses in war, while the leadership then finally adopted Lutheranism due to personal convictions.