Pressure from activist investors is starting to wear on George E. Langley.

The president and chief executive of Foothill Independent Bancorp insists that the Glendora, Calif., company wants to remain independent. But with New York investment group Basswood Partners calling for the company to improve its performance or put itself on the block, Mr. Langley is working overtime - discussing strategy with attorneys, updating employees, and, above all, trying to hang on to customers.

The $500 million-asset bank nearly lost one small-business client recently because of swirling rumors that its days are numbered.

"We never had these problems in the past," Mr. Langley said. "It is very discouraging for our staff and customers."

Mr. Langley's story is becoming a familiar one. Investors such as Basswood, LaSalle Financial Partners, Kalamazoo, Mich., Mid-Atlantic Investors, Columbia, S.C., and Seidman & Associates, Parsippany, N.J., are growing dissatisfied with some community banks' earnings and are urging those banks to sell.

The constant pressure is taking its toll on employees, other shareholders, and customers. In some cases, "it diverts attention from running the bank and is not in the best interests of shareholders in the long term," said Jeffrey C. Gerrish, a banking attorney in Memphis.

He suggested that privately held community banks might want to think twice about going public: "Do you really want to deal with institutional shareholders?"

For Melinda McIntyre, CEO of Santa Monica-based Professional Bancorp, a $253-million-asset bank, the challenge these days is keeping her employees motivated.

Like Foothill, Professional was identified by Basswood last year as an underperforming bank that should take steps to sell.

That pressure has also hurt the bank's efforts to recruit a chief financial officer and three new lending officers.

"Everyone has heard about this," Ms. McIntyre said. "I can't find a CFO that doesn't want a generous severance package and other option benefits."

Neither bank is a strong performer.

In the quarter that ended Sept. 30, Professional's return on equity-a key measure of profitability-was 8.41%, compared with a median average of 13.6% for other California community banks.

For the same period, Foothill posted returns of 9.32%, according to a community bank index compiled by Hoefer & Arnett, a San Francisco investment banking firm.

Most small banks and thrifts, industry sources say, are not prepared for the assaults launched by institutional investors, who make their intentions public through regulatory filings, conference calls, and shareholder meetings. Those reports are typically picked up by the media.

"These bankers are not ready professionally and emotionally," said John Duffy, director of corporate finance at Keefe, Bruyette and Woods in New York. "It can become an alley fight."

Market observers said last summer's slide in bank stocks - and the subsequent dropoff in mergers - has also played a role.

"Some of these institutional investors are legitimately frustrated," said Jean-Luc Servat, managing director of investment banking at Hoefer & Arnett. "The clock is ticking, and they may not get the premiums they were expecting."

LaSalle Financial partner Richard Nelson said the fund's reputation for activism has created tension at banks in which LaSalle owns stakes.

"They know our record," Mr. Nelson said.

LaSalle's typical move is to buy a stake of more than 5% in an underperforming thrift and, soon thereafter, to request a seat on the board and talk up the possibility of a sale.

That strategy has largely succeeded. LaSalle has forced the sales of five companies recently, including HF Bancorp in Hemet, Calif., and Standard Financial Inc. in Chicago.

In one instance, however, the process backfired. After pressuring MFB Corp. in Mishiwaka, Ind., the thrift decided to buy out LaSalle's position.

"We would like to work with these companies on a more friendly basis than we have in the past," Mr. Nelson said.

Friendly would not describe the relationship between Basswood and Foothill. Basswood, which owns 9.25% of Foothill's stock, on Thursday filed a court petition accusing Foothill of wrongfully withholding a shareholder list, accounting books, and boardroom records and minutes.

According to a Securities and Exchange Commission filing, Basswood said Foothill has "without justification failed to comply with its request" under California law.

Matthew Lindenbaum, who runs Basswood with his brother, Bennett, said Foothill's directors and senior management are shirking their fiduciary duties. He said bank officers have not returned their calls or agreed to a meeting.

"It's unfortunate," Mr. Lindenbaum said. "I didn't want this to get ugly."

Still, banks can avoid such confrontations by posting strong numbers.

The best way to justify independence, Mr. Gerrish said, is to post solid returns on assets and equity.

"Nothing beats performance," he said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.