Could You Be a Target of Shareholder Activism?


shareholder-activism-2-2-16.pngShareholder activism appears to be on the rise again, after subsiding somewhat during the financial crisis, and hedge funds are driving most of it, according to speakers Monday at Bank Director’s Acquire or Be Acquired Conference in Phoenix.

“They want to create public discussion and increase value through an increase in stock price or sale,’’ said Bill Hickey, co-head of investment banking for the investment bank Sandler O’Neill + Partners.

Activist hedge funds’ assets have risen 11-fold from 2003 to the third quarter of 2015, to $131 billion, according to Hedge Fund Research reports.  Banks are hardly immune. In fact, Sandler O’Neil analyzed acquisitions above $50 million in value for banks and thrifts traded on a major exchange since January 1, 2014, and found 61 percent of the sellers had activist shareholders involved. Recent targets have included New York-based Astoria Financial Corp., which announced a sale to New York Community Bancorp late last year shortly after Basswood Capital Management filed what’s known as a 13-D letter with the Securities and Exchange Commission, announcing the hedge fund had acquired a significant stake in the bank. Some activists have even ganged up on banks together, which was the case with Harrisburg, Pennsylvania-based Metro Bancorp; Cincinnati, Ohio-based Cheviot Financial Corp.; and Alliance Bancorp, Inc. of Pennsylvania, the speakers said.

Underperforming community banks are most likely the targets but bigger banks such as CIT and Bank of New York Mellon also have been subject to activist attacks. “In the last couple of weeks, we’ve heard more and more noise about the potential for larger organizations to be targets,’’ Hickey said. But really, almost any bank can qualify as a target. According to Hickey, traits that often attract activist investors include having a stock that trades at a discount to intrinsic value, having substantial cash or liquid assets, underperforming a peer group of banks, having inefficient operations, or even just having the potential to sell for a premium. Even private banks are subject to shareholder activism. Peter Weinstock, an attorney with Hunton & Williams LLP, said he has represented banks as small as $100 million in assets with proxy battles and family-owned banks whose shareholders do battle with the board.

While bank CEOs and boards generally despise them, activist shareholders argue that the pressure they apply to boards and management teams can lead to an increase in shareholder value and propel sluggish management teams to make improvements. Share prices often increase substantially after an activist hedge fund gets involved. Most often, activist hedge funds are looking for a sale of the bank, and if no suitable buyers appear, they go away, Hickey said. Sandler and Covington identified the major activist shareholders targeting banks right now, and they include PL Capital, Stilwell Value, Basswood Capital Management, Veteri Place Corp., Jacobs Asset Management, Clover Partners and Ancora Advisors.

Defenses against shareholder activists include tracking the bank’s performance to peers, as well as the bank’s shareholder rights practices and compensation in relation to peers, because that’s what the activists do, said Rusty Conner, an attorney with Covington & Burling. Boards should also pay close attention to shareholder advisory firms’ recommendations, especially if the bank has a significant institutional shareholder ownership. Also, Conner said it pays to beef up your communication with shareholders, and make sure you have a media relations and investor relations team ready to spring into action if your bank is targeted.

In general, banks are bit tougher for activist investors to crack, as they are heavily regulated and even gaining two seats on the board may constitute taking a controlling interest in the bank’s board, said John Dugan, an attorney with Covington. Investors who take a controlling interest potentially become subject to regulation as a bank holding company. Also, regulators have to approve a bank’s capital plan, including the payment of dividends and share buybacks, so struggling banks often are restricted in what they can do for shareholders.

Still, it pays to get your bank ready if you might be vulnerable to an attack.

Solutions for Community Banks in the Public Markets: Q&A with Broker-Dealers


5-9-14-OTC-Markets.pngSmall banks that have a tough time generating interest from shareholders have numerous tools at their disposal. OTC Markets Group talked recently to two broker-dealers who specialize in community bank stocks about their advice to small, publicly-traded banks and their outlook for the community bank market this year. Joey Warmenhoven of McAdams Wright Ragen has more than 16 years of experience in community bank stocks. Nick DeMaria and Tim Padala of StockCross Financial Services have more than 24 years and 23 years of experience, respectively, in the public markets.

OTC Markets Group has approved both of the FINRA-member* broker-dealers as “corporate brokers” for OTC Markets Group’s new public market for community and regional banks, called OTCQX Banks. The new market will provide banks the opportunity to have their stocks trade on a trusted and shareholder-friendly marketplace with dedicated capital market support and increased visibility with investors. For more information on the new marketplace, click here.

What is the most common question you receive from bank officers and directors about their publicly trading securities and what is your advice?

Warmenhoven: The most common question I receive is, “What can we do to get our stock price up?” My answer is promote your company the best you can and maximize your return on equity. Those two things will ultimately get your shares trading at a higher valuation.

Padala: The most frequent question we hear from the issuers is, “How do we increase liquidity and reduce volatility in our stock?” First of all, if you increase liquidity, the volatility will reduce along with the added liquidity. The next question is usually, “How do we accomplish the goal of adding liquidity?” The answer is to increase awareness in both the local community and investor community in order to widen the investor base. The best way is to get to know the local brokers in your community that are holding your stock in street name for customers. These brokers can be your lifeline to the investors that you are seeking.

Also, get to know your “market makers.” Small, regional and local bank stocks are never going to trade like a high flying tech stock in that millions of shares can be paired off within seconds. The market maker and the local stock broker are the ones that can identify a previous buyer or seller and reach out to them.

What clients do you represent and what value will you bring to your role as a “corporate broker?”

Warmenhoven: [We] represent institutional and individual bank investors from all over the country. [We] have 20 years of experience trading and researching small banks. [We] know the players that are interested in this space and can bring [our] network of investors to the table. In my opinion, this is the strongest asset a corporate broker can provide.

DeMaria: StockCross Financial is a full service and discount brokerage, wealth management and trading firm that is privately owned and operated and has offices around the country. Our bank trading division specializes as a “market maker” in local community banks stocks. In doing so, we are in extremely close contact with the local bank stock investing community, be it institutional investors, other brokerage firms, along with individual bank stock investors. As a wholesale market maker, we tend to be a destination where customer orders end up after being entered at other brokerage firms, be it online, regional or national wirehouses.

What is your outlook for the U.S. community and regional bank market this year?

Warmenhoven: I am optimistic that banks will continue to perform favorably. We will likely see continued consolidation and improved earnings which bode well for bank stock prices.

DeMaria: Most likely, more of the same. The larger banks have returned to a more normalized environment in terms of multiples and predictability of earnings as the panic of the last several years continues to move farther into the rear view mirror. The smaller regionals and super community banks seem to be firing close to all cylinders now, and things will improve as they continue to move closer to the historical norm in terms of both profitability and trading multiples. The more difficult question would be: What happens with the smaller community banks? While most of the issuers have taken their medicine and returned to form, there are still some laggards that are struggling either with capital issues or the prospect of severe dilution to rectify legacy capital issues.

*FINRA stands for Financial Industry Regulatory Authority.