Shareholder activists are gathering strength as bank stocks stagnate and the volume of mergers dwindles.

Several investors with reputations for prodding bank managements to improve results or sell out warned at a conference here last week that they cannot wait indefinitely for valuations to improve.

"Unfortunately, more and more bankers are taking a cruise to Fantasy Island," said Jerry Shearer, managing partner of Mid-Atlantic Investors, Columbia, S.C.

"My message to you is get on the good ship Reality and take your shareholders to the promised land," he said. "Otherwise, you may wake up from your dreams one day and find that I have become your worst nightmare."

The climate for bank investors has been chilly this winter.

As of midday Friday, the American Banker index of the 225 largest bank stocks was off 4% for the year. That is a big improvement from the 10% deficit at the index's recent low on Feb. 9, but does not compare well against the gains of 1.28% for the Dow Jones industrial average and 0.65% for the Standard & Poor's 500 stock index.

Banks have stagnated in a climate of worry about the strength and direction of the nation's economy and uncertainty about the impact of adverse foreign economic developments. Meanwhile, bank mergers, once the prime driver of bank stock values, have become scarce.

"There will be more people like me" because of the environment, warned Seymour Holtzman, a prominent shareholder activist who is president of Financial Value Fund.

Mr. Shearer and Mr. Holtzman spoke at a conference titled "Acquire or Be Acquired," sponsored by Bank Director magazine. Their concerns were taken seriously by a veteran bank stock watcher, James J. McDermott Jr., chief executive of Keefe, Bruyette & Woods Inc., New York.

"Low stock prices and slow action in consolidation may stir up some activism," said Mr. McDermott. "Clearly, midcap and small-cap stocks have taken a drubbing in the last few months, and because of that we may see pressure" from the shareholder community.

Mr. Holtzman warned bankers against letting their companies' earnings per share, returns on equity, and other financial barometers decline.

"When management is doing well, I can be their best friend," Mr. Holtzman asserted. "But if efficiency ratios are poor and ROE is not improving, I may have to have a meeting with management, and that may not be so pleasant."

Though Mr. Holtzman got his point across, his remarks were more circumspect than those he made at the same conference a year ago. Then he said:

"The board of directors should be your greatest assets, but in most cases I have found them to be the worse impediment. I have seen many boards consist of old men in their eighties and nineties, most of whom don't have a clue about managing a public company and are not even smart enough to have bought a lot stock in the initial public offering, and merely own a token number of shares."

Investment banker, Karen Edwards of Friedman Billings Ramsey Inc., Arlington, Va., said she doubted that shareholder activism could build toward the boiling point in companies whose stock is not actively traded.

"Seymour Holtzman is still unusual," she said. Most investors have diverse portfolios and lack "the time or the inclination" to apply pressure tactics against bank managements.

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