Activist Bank Investors: the Ultimate Cheat Sheet
The sudden wave of bank M&A has activist shareholders singing hallelujah.
Dissident investors typically make money by buying large stakes in banks and thrifts and, over time, pressuring management teams to enhance shareholder value. The process often includes costly proxy battles, and the endgame is often an institution's sale to a larger rival.
Consolidation nearly ground to a halt after the financial crisis as banks became leery of credit risk and regulators showed a reluctance to sign off on large-scale combinations. As a result, many activist investors laid low, waiting for things to change.
Traditional gadflies are again pressing banks to find buyers. They could soon be joined by less vocal investors who still know how to put pressure on executives and directors.August 25
Avoid the bluster and the defensiveness, and focus on communication and steps to improve the bank, veterans of activist investor fights like John Palmer of PL Capital advise.May 17
The noticeable shift began early last year, with the number of mergers holding steady from 2014 and total deal values reaching their highest level since the crisis. Activist investors benefited, and several banks that had faced shareholder pressure to improve returns agreed to sell.
Six activist groups have helped fuel bank consolidation in the last year: Ancora Advisors in Cleveland; Basswood Capital Management in New York; Clover Partners in Dallas; PL Capital in Naperville, Ill.; Seidman Associates in Parsippany, N.J.; and Stilwell Group in New York.
American Banker examined scores of regulatory filings, along with corporate websites and profiles from Bloomberg and Forbes, to compile descriptions of each of these firms, which tend to blend into the background unless they are challenging for a board seat or pressing a target to sell. Three of the firms — Ancora, Clover and Seidman — responded to a series of emailed questions about their histories and investment strategies.
Here is a breakdown of the banking industry's most notable — or notorious — activist investors.
Ancora has gotten the attention of bank management teams in recent years. That is understandable, considering the company's leader has an intimate knowledge of banking.
The firm is run by Chairman and Chief Executive Frederick DiSanto, who once managed Fifth Third Bancorp's investment advisers division, a role he took on after the Cleveland regional bought Maxus Investment Group in 2001, where he was president and chief operating officer.
Founded in 2003, Ancora is an employee-owned firm with about $2.2 billion in discretionary assets under management and another $1.2 billion of nondiscretionary advisory assets. The firm has stakes in nearly 30 banks and thrifts with a total market value of about $65 million, based on data compiled by FactSet Research Systems.
Its biggest holdings, in terms of market value, are Farmers National Banc Corp. in Canfield, Ohio, ($14.5 million) and MutualFirst Financial in Muncie, Ind., ($9.5 million). Ancora has stakes of greater than 5% in four banks and thrifts, including an 8.7% position in Riverview Bancorp in Vancouver, Wash.
"We are primarily focused on banks with assets between $750 million to $2 billion, but we will evaluate both smaller and larger banks on a case-by-case basis," DiSanto wrote in an email, adding that bank investments are largely handled by Ancora's alternative investment funds.
"A common theme for everything we do is focus on value, small/micro cap stocks, and securities trading at or near tangible book value," DiSanto added. "Banks fit well into this theme, as many small banks currently trade at or near tangible book value, with high-quality balance sheets and loan portfolios, and with verifiable franchise-scarcity value."
Ancora recently tried to press MutualFirst's management to seek a buyer, claiming that the company had produced subpar returns on equity and suffers from an undervalued stock. The moves spooked MutualFirst so much that it formed an alliance with PL Capital that gave PL a board seat in exchange for support against Ancora. The move worked; Ancora backed off an effort to gain control of some board seats.
"The intensity of our activism is predicated upon management and the board's response to our suggestions," DiSanto said.
"We contact management as part of our diligence process and usually meet face to face before any outwardly aggressive filings," he added. "Our goal is to keep open dialogue with management. They should be held accountable for their performance on behalf of all shareholders. Board representation is not always a requirement for our investment but considering Ancora is probably one of the most concentrated bank investors out there ... we do more often than not want a seat at the table."
Basswood Capital Management
Matthew and Bennett Lindenbaum formed their investment firm in the mid-1990s. Following a four-year hiatus that ended in 2010, the brothers significantly ramped up efforts to pressure banks, and they often target institutions that are a bit larger than those typically in the crosshairs of activist investors.
Matthew Lindenbaum, who has a seemingly more public profile, began his career in the mid-1980s in the mortgage finance group of Merrill Lynch Capital Markets. He became one of the early employees of SNL Securities, a Charlottesville, Va., boutique research firm, where he rose to general partner. He was also a founder and big investor in Community National Bank in Melville, N.Y., which sold itself last year to Bridge Bancorp in Bridgehampton, N.Y.
Sales are common outcomes for Basswood's investments. Metro Bancorp in Harrisburg, Pa., Hudson Valley Holding in Yonkers, N.Y., and Astoria Financial in Lake Success, N.Y., are among sellers that have been in the company's portfolio. The $15 billion-asset Astoria, when it agreed to sell itself last year to New York Community Bancorp in Westbury, became one of the biggest activist-pressured financial institutions to find a buyer.
Basswood has stirred controversy in recent years.
Banc of California in Irvine filed a lawsuit in 2014 against Basswood, claiming the hedge fund violated a 2012 confidentiality and nondisclosure agreement tied to a potential private placement by using information in the pact to buy shares in the open market. The parties settled the matter a few months later.
Clover Partners did not set out to become an activist investor focused on the banking sector.
Michael Christopher Mewhinney co-founded the firm in late 1999 as a hedge fund with a generalist focus. Mewhinney, who once worked in institutional sales, had a lengthy resume in the financial services industry, co-founding money management firm Barrow, Hanley, Mewhinney & Strauss in the late 1970s.
The firm's focus shifted in the run-up to the financial crisis, starting in 2004 when it hired Johnny Guerry, who had just completed a business program at Southern Methodist University. Three years later, Clover started its MHC Conversion Fund, which Guerry runs. Around that time, Mewhinney closed his fund and effectively retired.
"We've gone through a pretty dramatic transformation since the genesis of the institution," Guerry, now Clover's managing partner, said in an interview.
Clover manages nearly $250 million geared toward investment in thrifts and small-cap banks. The firm has stakes in 28 banks and thrifts with a total market value of $185 million. Its investments are relatively modest in size, with just two — Bank Mutual in Milwaukee and Pacific Mercantile Bancorp in Costa Mesa, Calif. — having market values over $1.3 million.
Chicopee Bancorp in Chicopee, Mass., is the only banking company where Clover holds a stake of more than 9%.
"We spend a lot of time thinking about the downside," Guerry said, explaining his firm's investment strategy. "We are much more a stay-rich hedge fund rather than get-rich hedge fund."
Guerry said he looks for undervalued banks with underlying potential and "optionality for banks to improve capital, cut expenses and improve profitability in order to garner a higher trading value." A bank's potential to sell, once the "ship has been righted," also factors into an investment decision, he said.
Clover took its first activist positions a few years ago at Chicopee and Hampden Bancorp in Springfield, Mass.
"We think about activism along a continuum where on one end you can have conversations with management or, in extreme form, where you have a proxy contest," Guerry said.
"We have never been in the position where we made an investment for the purpose of being activist investors," he said.
"It is unfortunate when it comes down to a proxy contest," Guerry continued. "We try to work with management and the board as much as possible. We're trying to find management teams that are incentivized to act as owners of the firm. We don't want [a proxy battle] because it is a timely and expensive process."
Clover has held stakes in several banks that have eventually been bought, including Metro and Hampden.
Clover last month criticized Financial Institutions in Warsaw, N.Y., for two recent nonbank acquisitions, while urging management to consider selling the company. And it recently unveiled plans to pursue board representation at Bank Mutual. Clover also plans to launch a proxy battle against Bank Mutual as it pursues board seats.
Activism does not always lead to acrimony, Guerry said, adding that he has "been working very constructively with the management team" at Chicopee.
"Management really shouldn't be opposed to having someone on the board with capital markets experience," Guerry said. "When they are completely aghast having a shareholder on the board it shows that they're worried about someone forcing them to be a little more thoughtful."
Richard Lashley, a former certified public accountant, and John Palmer, who provided auditing services and financial advice to financial institutions, left KPMG and formed their Chicago-area investment firm in late 1995. They have spent the last two decades pressing banks to improve performance and shareholder returns.
While PL Capital has engaged in a fair share of proxy battles, Lashley and Palmer also have a number of instances where they have amicably worked things out with management teams. The two men, or their handpicked representatives, frequently end up on boards due to standstill agreements.
PL Capital has moments where they support management. The firm, for instance, quickly threw its support behind Anthony Weagley after he became CEO of Malvern Bancorp in Paoli, Pa.
"The day after we get elected, we start a dialogue with all the directors on the business issues," Palmer said in a May 2012 interview. "At first, the relationship can be a bit combative, but it isn't about going in there and yelling and screaming. I spend two days preparing for those meetings because it is all about the opportunity to share facts and set the agenda."
Palmer is a director at HF Financial in Sioux Falls, S.D., which recently agreed to sell itself to Great Western Bancorp, and BankFinancial in Burr Ridge, Ill. Lashley sits on the boards of Metro and MutualFirst.
PL Capital had stakes in 37 banks and thrifts as of Sept. 30, with a total market value of $292 million. Its biggest holdings include Metro, Banc of California, and Enterprise Financial Services in Clayton, Mo. In four instances, PL Capital holds stakes that top 9%.
At Banc of California, PL Capital is putting pressure on the board to disclose details about Chairman and CEO Steven Sugarman's ties to GPS Partners, an investment fund that the Securities and Exchange Commission hit with a cease-and-desist order in 2010.
Seidman & Associates
Lawrence Seidman has been a feared name among banks and thrifts for more than 25 years.
A lawyer who once worked at the Securities and Exchange Commission, Seidman got into bank investing in 1983, but really stepped up his activism in the early 1990s.
"Banking was a business that I understood," Seidman said in an interview. "I considered it a consolidating industry and got involved."
Seidman has waged some legendary battles, with many turning into protracted conflicts that eventually found their way into the courtroom. His tussle with Clifton Savings Bancorp in New Jersey included a lawsuit by Seidman intended to force the company to mail its members a letter from the activist seeking support for his board nominees.
Spencer Savings Bank in Elmwood Park, N.J., filed a lawsuit against Seidman in 2007, accusing him of trying to gain control of the mutual as part of an effort to force it to go public. Five banking trade groups, including the American Bankers Association, filed briefs in support of Spencer Savings. He legally clashed with Spencer Savings again — in 2013 — over the company's ability to control the process for director elections.
Still, Siedman has a simple view of bank activism.
"I'm just a value investor," said Siedman, who typically focuses on banks with $5 billion or less in assets. "I look at what will create value and what's cheap based on what I think the ultimate value is."
One of Seidman's most infamous battles was lengthy. He spent years sparring with Yardville National Bancorp's board and management, filing several lawsuits as part of a campaign to force the Hamilton, N.J., company to oust its CEO or find a buyer. He got his wish in 2007, when Yardville finally agreed to sell itself to PNC Financial Services Group in Pittsburgh.
He also played a role in sales at Center Bancorp in Union, N.J.; Naugatuck Valley Financial in Naugatuck, Conn.; and OBA Financial Services in Germantown, Md. Seidman helped break the ice between executives at Center and eventual merger partner, ConnectOne Bancorp in Englewood, N.J. Seidman, a Center director who agreed to shed most of his shares as part of the merger, received $100,000 under a two-year consulting deal.
"We don't just go in and say sell the bank," Seidman said.
"There was one instance where I ran a proxy contest and won, but we focused on improving the bank over the next seven years," he added. "It depends on the management team. We look at each situation on its own merits. ... We haven't run a proxy contest in nine years because many management teams are more agreeable to working with [investors] rather than fighting with them."
Joseph Stilwell has been pushing banks to improve shareholder value for more than 20 years, forming what would become Stilwell Group in the early 1990s.
Stilwell is known for having a no-holds-barred mentality when tussling with management teams. Two years ago, his firm sent investors of Harvard Illinois Bancorp a photo of William Schack, a former chairman, asleep at the prior year's annual meeting. "None of the other board members bothered to wake him up," Stilwell deadpanned in his letter.
Stilwell had positions in 62 banks and thrifts at Sept. 30, with those holdings having a combined market value of $173 million. Three of those holdings — First Financial Northwest in Renton, Wash.; Provident Financial Holdings in Riverside, Calif.; and Malvern — have market values in excess of $11 million.
Stilwell and his funds hold stakes topping 9% at 15 banks and thrifts. Based on Stilwell's regulatory filings, more than a dozen banks have opted to sell themselves after his funds pressured the companies to improve shareholder value, dating back to the June 2000 sale of Security of Pennsylvania Financial.
At the end of the day, capital management is very important to Stilwell.
"As an investor, what you want to make sure happens is that growth doesn't take place for the sake of growth," Stilwell said during a December 2011 panel in New York hosted by American Banker. "You're looking for intelligent growth. ... You're looking for the best managers to use capital to acquire others, and you're looking at the bad managers to make sure that they're ... returning it to the shareholders."
Stilwell has a number of victories under his belt.
His funds pressured Naugatuck Valley in Connecticut and Fairmount Bancorp in Baltimore before each agreed to sell last year. Stilwell launched a successful effort that led to the August 2013 departure of First Financial CEO Victor Karpiak. He also objected to plans by HopFed Bancorp in Hopkinsville, Ky., to buy Sumner Bank & Trust; the deal was called off shortly after Stilwell placed a representative onto HopFed's board.
Stilwell and his firm have also been on the receiving end of controversy.
Stilwell has maintained a low profile since he and his firm were accused by the SEC of failing to properly disclose loans made among funds they controlled. He settled those claims last year without admitting wrongdoing, agreeing to a censure and a nearly $600,000 fine, according to a report on law360.com. Stilwell also accepted a one-year ban from associating with a broker or investment adviser.
Stilwell also has moments when he openly backs management. Like PL Capital, he threw his support behind Weagley shortly after he became Malvern's CEO. And he defended Anchor Bancorp in early 2014 when another investor pressed the Lacey, Wash., company to sell itself.
"These folks are definitely working hard to right the ship," Stilwell said of Anchor's management team, adding that he was impressed with their efforts to improve shareholder value.