Virginia Investor Places Big Bets on Small Banks

If you run a good bank, expect a call from Ken Lehman.

A former securities lawyer, Lehman evolved into a serious bank investor over the last decade and, after surviving the financial crisis, seems poised to leave his stamp on the financial sector.

His holdings have commanded attention lately, including a 41% stake in First Capital Bancorp (FCVA) in Glen Allen, Va., and a 29% stake in Liberty Bell Bank (LBBB) in Marlton, N.J. He is also a director and corporate secretary at Virginia Commerce Bancorp (VCBI) in Arlington, Va., which agreed last month to sell itself at a healthy premium.

But Lehman doesn't view himself as an activist investor intent on shaking up the system. Rather, the media shy moneyman portrays his positions as votes of confidence. Small banks with good management can beat the odds, he says.

"What makes a good community bank is the relationships it has with its customers," he says. "I find that a bank's relationships with customers get more tenuous as the bank gets bigger."

Community bankers should familiarize themselves with Lehman. Why? Because Lehman, who screens his own investments, often reveals his plans to make big investments in phone calls directly to chief executives.

"Ken called me out the blue one day" in late summer 2011, says John Presley, CEO of the $543 million-asset First Capital. "He had noticed that our …underlying finances looked very attractive. He had also been calling CEOs of other companies that had popped up on his screen."

Lehman's big play on Liberty Bell also took the $174 million-asset bank by surprise. "We're learning about him pretty much like anyone else is," Kevin Kutcher, the bank's president and chief executive, says. Kutcher's first encounter with Lehman took place a few weeks ago when the investor called to talk banking.

"I got a favorable first impression," Kutcher said of the 40-minute conversation. "He's certainly familiar with our history and the players in our markets. We're looking forward to meeting him."

Lehman was drawn to bank investing while at Luse Lehman Gorman Pomerenk & Schick, a law firm he co-founded in the early 1990s. Over time, he began focusing more on the underlying financials of his legal assignments. By 2002, he was ready leave the firm to focus solely on investing.

Lehman was "a great advisor because he loved the finance side of things," says John Gorman, a partner at the firm. "We were doing a lot of legal work for M&A and capital raising when he realized he had a real knack for understanding the value in investments."

A look at Lehman's investment history would indicate that his modus operandi involves making money when a bank sells. From 2003 to 2005, he co-founded three banks; each sold within four years of their debut. But Lehman, and those who know him, says he is not a quick-flip artist.

"He's driven by shareholder value," says Bill Boyan, a managing director at Sandler O'Neill who has known Lehman since he worked in Luse Lehman. "He's in favor of running an institution over the long haul if you can show him that it can create value on an organic basis. In most situations, he's not pounding the table demanding that people sell."

"I don't see myself as someone who comes in and sells banks," Lehman adds. "You build banks with a long-term game plan … but sometimes management creates so much value that the long term turns into the short term. You end up with banks that other banks want to buy."

Lehman claims to have a simple investment strategy. He focuses on demand deposits, particularly checking accounts. "It is money that customers are willing to give the bank for free," he says. "When you find lots of checking accounts, you are looking at a bank that has strong customer relationships."

Lehman also evaluates a bank's top executives, which helps explain his tendency to dial up CEOs. "When you align with great management, they create value," he says. "My investment style in the early 2000s was to accumulate stakes in the open market where I didn't know management as well. I now know management much better."

An dust-up at an early investment taught Lehman about the importance of management. He became a "reluctant" activist at Service Bancorp in Medway, Mass., in 2008 after management rebuffed his offers to assist with a turnaround.

"Something was going wrong," he says of the company. "Loan quality was deteriorating quickly and earnings were on the decline. … I reached out to them and told them I wanted a seat on the board to help them right the ship. They told me to write a letter to the nominating committee, which decided not to nominate me."

A public scuffle followed. Lehman filed a lawsuit against Service in early 2008 to obtain a list of shareholders; he also took out a full-page ad in the local newspaper to question the company's performance.

Service replaced its CEO a few months later and sold in late 2009 to Middlesex Savings Bank. Efforts to reach Pamela Montpelier, the CEO who clashed with Lehman, and Eugene Liscombe, Service's chairman at the time, were unsuccessful.

"The bank ultimately did the right thing," Lehman says.

Lehman is taking on considerable personal risk as he bets big on community banks. There's no investment vehicle or corporation to serve as his liaison.

As a result, Lehman isn't required to form a bank holding company to support his hefty positions. "I've toyed with having a fund," Lehman says.

"My guess is that Ken trusts himself as much or more than any fund manager," says Jerry Ernst, president and chief executive at Horizon Community Bank in Lake Havasu City, Ariz., and a former CEO at two of Lehman's de novo banks. "When you're in a fund you're making someone else rich."

Lehman says he likes being his own boss, with one exception.

"Sometimes I see opportunities and I'm not liquid because of my involvement at other banks, and it would be helpful to bring in other people's money," he says. "At the end of the day, I like having to answer only to my wife and my 12-year-old rather than other investors who maybe aren't as patient with me."