Shareholder Activism Could Spur New Wave of M&A

An increasing number of banks have been looking for buyers in the face of growing pressure from activist investors.

Dissident shareholders, who backed off during the financial crisis as consolidation ground to a halt, are back with a vengeance. The typical gadflies known for waging proxy battles are back and could be joined by fresh faces that include index investors that have traditionally backed management.

A return in activism will likely spur more deals, industry experts said.

"It is a ripe time for activist investors to be pushing some of these companies that are underperforming to sell," said Rick Maples, co-head of investment banking at Keefe, Bruyette & Woods.

The amount of money broadly involved in activism has exploded in recent years, said Emmett Daly, a principal in the investment banking group at Sandler O'Neill. Hedge funds are dedicating $125 billion to activism across various industries, compared with $32 billion in 2008, he added.

Some of that money is being directed toward the financial services sector, though the exact amount is hard to gauge. "Activists have been successful at stimulating M&A" in the past, so if there will be M&A, the "activists may remain in the space to play a part in that," Daly said.

Roughly half a dozen activist investors are working in the financial services sector, with some holding interests in up to 40 to 50 banks at a time, said Jack Thompson, head of the financial institutions investments at Gapstow. Generally, such shareholders focus on expense and capital management, with an occasional effort to push a bank to sell itself.

"If an activist investor thinks that a management team isn't doing a good job of representing investors, often the quickest and easiest thing to do is to push for a sale," Thompson said.

"Many times, these investors are pointing at a bank that may be overcapitalized merely for the benefit of the management team's job security, instead of taking appropriate lending risk or returning unused capital," Thompson added. "That is not a good service to the shareholders, the banking system or the economy as a whole."

Activist investors are stepping up pressure because many banks have struggled to grow organically and increase revenue due in part to artificially low interest rates, said Joseph Vitale, a partner at Schulte Roth & Zabel. Stagnant community banks are usually targets, though activism is starting to creep up into regional banks, he said.

"It's an issue for banks that aren't really growing and haven't found a way to thrive in the current environment," Vitale said. "Shareholders are thinking that it's better to find an exit strategy."

Astoria Financial in Lake Success, N.Y., is one of the banks that is feeling pressure from a dissident shareholder, even though its second-quarter income jumped 40% from a year earlier, to $31.4 million.Basswood Capital Management, a hedge fund with a history of activism, is pressing for a board seat as part of a bigger effort to force the $15.3 billion-asset Astoria to find a buyer.

One of the "biggest criticisms we have [of Astoria] is they don't earn their cost of capital," said Bob Ramsey, an analyst at FBR Capital Markets. "Their profitability is below the industry," and its return on assets and return on equity lag many other banks.

Basswood took similar steps when it bought a big stake in Hudson Valley Holding in Yonkers, N.Y., gaining a board seat in March 2014. Hudson Valley agreed to sell itself to Sterling Bancorp in Montebello, N.Y., eight months later.

Basswood did not respond to a request for comment. Astoria declined to comment for this story, though Chief Executive Monte Redman said in a previous interview with American Banker that the "long-term" investor's request for a board seat would be handled "within our normal governance process."

Metro Bancorp in Harrisburg, Pa., recently agreed to sell itself to F.N.B. Corp. in Pittsburgh after facing pressure from investors that claimed that Metro was under performing in areas such as efficiency and return on assets.

The management team at the $16 billion-asset F.N.B. did not address shareholder activism during a conference call to discuss the deal, though they did talk about an effort to right-size Metro's expense base.

"Our combined organization will benefit from a number of expense measures leading to improved efficiency," Vince Delie, F.N.B.'s president and chief executive, said during that call. "On the revenue side, we expect to drive growth through a more diversified and robust fee-income stream."

A representative for F.N.B., which also bought the activist-challenged OBA Financial Services, declined to comment. Metro did not return a request for comment.

Banks should expect more interactions with investors such as firms with exchange-traded funds and holders of trust preferred securities, industry experts said. Exchange-traded funds and index investors have gotten more active in other industries, though they are unlikely to be as disruptive as traditional activists, Maples said.

Instead, these new activists could serve as swing votes for traditional gadflies as they become disinclined to automatically vote with management as part of a bigger effort to make sure banks have good corporate governance policies, industry experts said.

Holders of trust preferred securities are also looking to influence decision making, but could struggle to secure the votes needed to act, said Evan Tomaskovic, co-leader of the community banking group at Carl Marks Advisors. In some instances, banking companies have decided to sell their banks through bankruptcy auctions under pressure from these investors.

"We should see a lot more of this over the next 12 months," Tomaskovic said. Trust-preferred holders "are getting more sophisticated about their remedies, and buyers are getting more comfortable buying banks out of bankruptcy."

Some battles could be avoided if management teams were less defensive when investors asked questions, said Dory Wiley, president and chief executive of Commerce Street Holdings. Most investors aren't looking to take over, though they "want to ask questions and improve things," he said.

Commerce Street, which prefers to work with executives, tries to avoid becoming hostile, though it has gone on the offensive in select occasions, Wiley said. For instance, Wiley asked to address the board at Coronado First Bank in California about performance concerns, but the request was declined. The situation escalated; the $80 million-asset bank sold itself in 2011. (A fund affiliated with Commerce Street also led a proxy challenge against Orange County Business Bank in Irvine, Calif., earlier this year.)

"The investor should have the right to ask questions without the bank getting defensive, but that is sometimes interpreted as hostile," Wiley said. "We really think it is better if everyone works together."