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The board at Cardinal Bankshares Corp. responded Thursday to a series of demands by Douglas Schaller, rejecting the activist shareholder's assertion that the company should sell itself.
August 5 -
Cardinal Bankshares' biggest outside shareholder is hopping mad over an act that normally gives investors comfort: succession planning.
August 4
In his 30 years investing in banks, Douglas Schaller has never waged a proxy battle. But that may soon change.
Schaller, the biggest outside investor in Cardinal Bankshares Corp. in Floyd, Va., is escalating efforts to press for a board shake up and the company's sale.
"It is highly likely that I will initiate a proxy fight," Schaller said in an interview Friday at his office in Winston-Salem, N.C. "I've been talking to other investors and I believe I have the votes necessary to make changes to the board."
The head of Schaller Equity Partners, normally a passive stock-picker,
For now, he is urging investors to call directors, but there is a growing likelihood that he will try to rally votes to make changes next spring, when Cardinal hosts its next annual meeting.
In his letter, Schaller accused Cardinal's management of "hoarding far too much excess capital," which stood at $9.6 million at June 30, rather than investing it "for growth or returning it to shareowners."
Cardinal's Bank of Floyd had a total risk-based capital ratio of 16.5% at the end of the second quarter, in line with the average for Virginia banks of its size and well above regulatory requirements. The $237.9 million-asset bank averaged a 3% growth rate during the past five years.
Schaller said it took a lot of frustration to get to this point. An accountant by trade, he has invested in banks since the early 1980s, but only began buying shares of smaller banks two years ago.
Schaller has two large investments in banks with
Schaller, whose office is in a renovated mill building and resembles a Victorian-era study with 20-foot ceilings, large bookshelves and a sweeping staircase, said he looks for banks with solid deposit franchises that also need capital. That is what led him to invest in Cardinal earlier this year.
Now, he is calling on Leon Moore, Cardinal's longtime chairman, president and CEO, to step down, while proposing that another big shareholder, Howard Conduff, take over as chairman.
Conduff's "significant stock ownership should serve as a strong incentive to diligently explore strategic alternatives, including a sale, to maximize shareowner value," Schaller wrote.
Moore wrote in an email Thursday that Cardinal's board was preparing a response. He told American Banker in August that he had no plans to sell the company.
"We don't intend to just fold up shop and go away," Moore said. "We may not be the biggest on the block, but we continue to try to serve our community and grow, and that's our plan going forward."
Schaller, who owns 9.8% of the company, began voicing concerns shortly after Cardinal said that Bank of Floyd's president, Henry Logue, had resigned after six months on the job. Schaller said he started buying Cardinal's shares in February in hopes that Logue would spearhead growth.
His
Schaller has denied this repeatedly, stating that he bought Cardinal's stock because of its "bargain price," excessive capital and former president. Schaller argued in his most recent letter that he doubted Moore, a "one-man show," would retire "given his employment benefits and compensation."
Schaller wrote that Moore's compensation as a percentage of Cardinal's net income rose to 17% in 2010 from 12% in 2006, despite declines in dividends, share price and net income.
"In light of Mr. Moore's stubbornness in refusing to consider strategic alternatives that would realize value for shareowners, I have lost all confidence in his leadership of our company," Schaller wrote in Thursday's letter. "And, given his control over the board's agenda and the bank's operations, I have become gravely worried about the future value of our investment."
