Activists Give Clarion Call for Banks to Create Value

For many banks with less than $500 million of assets, "the overhead of operating as an independent bank is too daunting," says Douglas Schaller, a general partner at Schaller Equity Partners.

"The regulatory costs are eating into earnings … and there is no way to generate good returns for shareholders as a standalone."

Schaller has joined the ranks of activists such as Richard Lashley at PL Capital Group and Larry Seidman. Each has become more vocal while slowly boosting their stakes in select banks and thrifts.

Many investors believe now is the time for banks with capital to expand due to regulatory costs and low valuations, despite lack of loan growth, especially at just-converted thrifts and mutuals.

"The number of [activist] filings have picked up due to the … flurry of second-step and MHC conversions," says Lashley. Activists prefer thrifts that have converted because "typically, the valuations are attractive and there's also a lot of volume that typically occurs right when conversion happens."

PL Capital has been most active with former mutuals such as Alliance Bancorp Inc. in Pennsylvania; Polonia Bancorp Inc. in Huntington Valley, Pa.; and Magyar Bancorp Inc. in New Jersey. Lashley has become active in 10 out of his 12 largest bank investments. (PL Capital has shares in roughly 40 banks and thrifts.)

Likewise, activist heavyweight Joseph Stilwell has increased his stake and voice at several thrifts.

"The prices for these thrifts are good, the market has come down significantly … and they provide a good margin of safety," says Spencer Schneider, Stilwell's general counsel. "The second thing is, these are survivors. They may have warts but they have generally survived the market crash … and they have a future."

Since last September, Stilwell has filed 12 new reportable "active" positions in financial institutions. In recent weeks, he increased his holdings in Jacksonville Bancorp Inc. in Illinois and Naugatuck Valley Financial Corp. in Connecticut.

Schneider says that Stilwell's strategy is not about trying to obtain a board seat. Rather, Stilwell's objective is "to make sure that these banks operate at a profit and stay on the straight and narrow, and don't get fancy."

Schaller seems to be taking the same tact at Cardinal Bankshares Corp. in Floyd, Va., where he is the biggest outside investor. In June, he demanded that the company sell its Bank of Floyd after Henry Logue, Cardinal's president and CEO, abruptly resigned. Schaller, a 30-year bank investor, said he began investing in Cardinal late last year because he believed Logue would set the well-capitalized company on a path for growth. With Logue gone, Schaller is clamoring for change.

"If a third of your income is going to regulatory compliance costs [like with Cardinal], how can you generate a return for shareholders? It can't be done," Schaller says. "So you either have to grow or merge with another bank."

Cardinal's management could not be reached for comment but Leon Moore, the company's current chairman, president and CEO, has publicly said he would not consider selling.

"The activists that generated the greatest returns over the last five years were those that demanded the company explore strategic alternatives," such as a sale, says Damien Park, a managing partner at Hedge Fund Solutions LLC. Weak acquisition activity in recent few years halted activism, he said. As consolidation returns "we've seen a lot more [investor] activity and lot more companies exploring their options," Park says.