Activist investors scored victories against two community banks in recent weeks that demonstrate the risks posed by shareholders whose patience with slow growth has worn thin.

Clashes at First Financial Northwest (FFNW) in Renton, Wash., and HopFed Bancorp (HFBC) in Hopkinsville, Ky., came to a head just four months after proxy season, and they involved a common agitator: bank investor Joseph Stilwell.

Stilwell aggressively fought to oust Victor Karpiak, the longtime chairman and chief executive of First Financial. Karpiak announced his departure from the $902 million-asset company Aug. 22.

And concerns about an M&A deal by HopFed prompted Stilwell to mount a successful challenge for a board seat. The $949 million-asset company called off its purchase of Sumner Bank & Trust in Gallatin, Tenn., on Aug. 23.

"We tell our [funds'] investors that we aim for excellence, so this makes me feel good," Stilwell says. "Once we start with a company we never stop. I guess it is a reflection of my stubbornness."

Stilwell's determination is a trait shared by many activist investors, and bankers worry they can inspire other shareholders to become more vocal and demand changes.

An emboldened activist "is certainly something to be aware of," says David Peck, HopFed's chairman and president, though he says Stilwell was not the reason the Sumner deal was canceled. HopFed backed out, Peck says, because Sumner had fallen short of net worth and revenue performance targets outlined in the merger agreement.

HopFed lost a related battle with Stilwell in May when Robert Bolton, a fund manager backed by the activist investor, won a seat on its board. Bolton, who would not discuss the Sumner deal, says his role as an outsider is to challenge management and encourage other directors to do likewise.

"I'm the eyes and ears in the boardroom for all shareholders," says Bolton, the chairman and CEO of Iron Bay Capital in Rochester, N.Y. "When different points of view are considered, it can keep boards from making bad long-term decisions. Otherwise, an insulated board may just go along with whatever management decides."

It's less a matter of debate that the bitter dispute between Stilwell and Karpiak led to Karpiak's ouster at First Financial.

Stilwell lobbied hard in 2012 to oust Karpiak. Tension escalated after that year's annual meeting, when a proxy tabulation service tossed out votes that would have removed Karpiak from First Financial's board. Stilwell filed a lawsuit that sought to invalidate that decision.

A settlement reached in December, and later amended, permitted Stilwell to appoint Kevin Padrick, a senior principal at Obsidian Finance Group in Lake Oswego, Ore., to First Financial's board.

Karpiak agreed to step aside, accepting a $181,000 severance and a lifetime ban from the company he joined in 1977, according to his Aug. 21 separation agreement. Karpiak "acknowledges that, because of circumstances unique to him … he will not be eligible to hold any position with [First Financial] now or in the future," the agreement states.

Efforts to reach Padrick and Joseph Kiley 3rd, who is set to succeed Karpiak as CEO on Sept. 1, were unsuccessful.

Some question whether the ends justify the means in high-profile proxy fights.

"The activist agenda seems to involve going down a checklist, but at what cost?" asks Artie Regan, president of Regan & Associates, First Financial's proxy solicitor for the disputed 2012 annual meeting. After adding up expenses tied to legal fees, marketing and proxy solicitation, a lengthy battle often winds up as a "Pyrrhic victory" for activists like Stilwell, Regan says.

"I understand the activist agenda, but I also understand dollars and cents," Regan says. "Challenges work best when you huff and puff, directors back down, and you spend nothing. The best campaigns are the ones you never hear about."

In the case of First Financial, Stilwell has disclosed in legal documents that his firm spent nearly $2.2 million to dispute the results of the 2012 annual meeting.

Stilwell contends that he gets about 90% of his costs reimbursed by the banks he challenges, typically through settlements. He adds that he only mounted aggressive campaigns this year against three of the 32 banks he holds stakes in.

Some proxy fights that are seemingly over can reignite, too.

There is a chance that HopFed will revisit and reach a new agreement to buy Sumner.

"We left things with Sumner in a very good way," Peck says. "The Nashville market is one that we still have an interest in. We're looking at other opportunities and I would not exclude Sumner from that.

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