Some Investors Speak Softly and Wield a Big Wallet

Boisterous shareholder activists make headlines when they urge community bankers to earn better returns. But quiet, patient institutional investors may be making at least as big a mark.

Several of these lower-key groups-such as First Manhattan Co., Kennedy Capital Managers, and Keefe Managers - will buy sizable pieces of well- managed institutions and simply watch their investments appreciate.

"They're very smart people, and they make smart investments," said Wayne Bopp, a banking analyst at Robert W. Baird & Co. in Milwaukee. "Especially for a smaller financial institution, that's good news from a stability standpoint."

Although such investment groups shy away from the media spotlight, analysts who watch their investments say they generally earn strong returns and are respected in the investment community.

These investors have even built a following among others who try to emulate their strategies. The phenomenon has been termed the "Warren Buffett effect," after the well-known investor.

"It's like judging people by the neighbors they have," Mr. Bopp said. "First-class investors invest in first-class companies."

Because all but one of the investment groups declined to talk with American Banker, it is difficult to determine exactly how much money each group has invested in community banks.

Analysts say, however, that the groups-which also include Wellington Management Co., Boston, and John Hancock Advisers, New York-together have large holdings in hundreds of banks nationwide.

Kennedy Capital Managers, for example, has up to 20% of its $2 billion in banks, said president Gerald Kennedy. First Save Associates, a division of First Manhattan Co., indicated in Securities and Exchange Commission filings last month that it owned up to 9.3% of 10 different thrifts.

These relatively quiet investors buy into banks across a broad range of sizes and strategies, but bank analysts say they have one thing in common: The investors believe in the banks' managements.

Betsy Z. Cohen, president and chief executive officer of JeffBanks Inc., Philadelphia, said she views Keefe Management's and First Manhattan's interests in her company as an endorsement of long-term strategy.

"We hope it reflects the fact that they're seeing what we're seeing, which is significant returns on the horizon," she said. Ms. Cohen said Keefe Management held about 8.6% of $1.3 billion-asset JeffBanks' stock from the initial public offering in 1993 until about 18 months ago, when the group had earned its projected returns. First Manhattan continues to hold 1.5%.

Sources close to Keefe Managementsaid it bought at $15 in 1993 and liquidated when the share price surpassed $20.

Mr. Kennedy, of Kennedy Capital Managers, said the group does not invest in poorly managed companies. It looks for undervalued stocks that have not gotten attention from analysts and stock data base services. Once it has accumulated its share in a company, Kennedy Capital helps its companies better market themselves to other investors.

"We give advice" to banks it buys into, "but usually it's positive," Mr. Kennedy said. "We try to catch people who, frankly, are about to do something stupid."

Michael P. Brennan, president and CEO of Cincinnati-based Westwood Homestead Financial, said he appreciates having Kennedy Capital as a 10% shareholder. He said he prefers Kennedy Capital's investment approach to that of activist investors.

Then again, Kennedy hasn't had much to crow about. It bought its stake in $137 million-asset Westwood shortly after the initial public offering in September 1996. It went public at $10.13. The stock on Tuesday reached $15.50.

Last year, Mr. Brennan read a "not very nice" letter posted on-line by an activist shareholder and addressed to executives of another Cincinnati bank. The competitor's bank has since been sold, and Mr. Brennan said he doesn't want to be on the receiving end of an activist investor's wrath.

"They sense it's a wounded duck, and they just want to kill the duck," he said. "Having a Kennedy own stock rather than an activist? I'd rather go with a Kennedy."

Although most bankers enjoy good relationships with the institutional investment groups, analysts warned that there are consequences for banks who don't follow their "friendly" advice. Joseph A. Stieven, an analyst at Stifel Nicolaus & Co. in St. Louis, said the investors stay quiet as long as things are going well.

"These people are there to make that dirty five-letter word: money," he said, "and they're not emotional about it."

If the banks are not performing as well as expected, the investors simply liquidate their holdings. But Mr. Kennedy said the banks generally heed his advice.

"They know what side their bread is buttered on," he said.

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