Richard Lashley and his partner, John Palmer, were banking auditors for KPMG's corporate finance group in 1995 when they decided to launch an investment fund. Twenty years later, PL Capital LLC is considered among the savviest of activists in the community bank space. Their $300 million fund family has averaged returns of 12% annually since inception — including the period around the financial crisis. Now the firm, which has offices in Naperville, Ill., and Morristown, N.J., is launching a new fund targeting banks with assets of $3 billion to $75 billion, in what is part of a nascent trend of activist investors moving up the size scale to larger banks. What follows is an excerpt of our recent interview with Lashley.

After 20 years of focusing on small banks, why did you decide to start targeting larger ones now?
We see the same opportunities that we see in the community bank space. It's very hard to grow the balance sheet or earnings. All the good spots are taken. Even in a minor city, you can't just open up a branch in a good location. The ability to grow is very constrained. The only way to grow is to be a buyer or a seller.

We've held off on larger banks because of all the regulations — CCAR, stress tests, liquidity rules. Anybody over $10 billion has been operating under tougher constraints. But now we see that easing up. Everyone is compliant. Everyone has enough capital and is feeling comfortable with their processes and their systems. It's no longer about surviving the crisis or complying with regulations, it's about strategy. And strategy in banking is mostly about M&A.

What sort of response do you get from bank boards when you make your presence as an investor known?
It ranges from completely hostile to completely welcoming. We've tried to cultivate a good reputation. Increasingly, lawyers and investment bankers are telling them, "What's the harm in talking with them or having them on the board?" We're having an easier time getting on boards. The funny thing is, I don't want to be on a board of someone who wants me there. If they want me to go to meetings and sit on committees, I think, "I don't need to be there. They're not entrenched. They're thinking like shareholders." But if someone says, "We would never put you on the board," that's the trigger for me to demand a board seat.

Q: A lot of bankers resent the idea of some guy from New Jersey coming in and telling them how to run their bank. What do you say to them?
If you want to avoid us completely, go raise the money and don't remain a public company. Otherwise, the only way to avoid us showing up is by addressing your performance issues before we arrive.

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