Fed's ownership rule could open door to more activist investors

Activist investors stand to gain from the Federal Reserve's decision to create a framework for bank control.

A Fed rule finalized on Jan. 30 and set to go into effect on April 1 sets clearer standards for what would force investors that own less than a quarter of a bank’s voting stock to apply to become a bank holding company.

The move provides shareholders with a blueprint to build voting stakes of up to 24.99% without filing for BHC status, industry experts said. Many investors balk at becoming BHCs because of increased regulatory supervision.

The move could also create new investor headaches for smaller banks.

“I think that, by owning more shares, activist investors are likely to have more leverage over management once they actually file their position,” said Damon DelMonte, an analyst at Keefe, Bruyette & Woods.

The rule “really opens the door for people to go and replace entire boards,” said Abbott Cooper, a managing member at Driver Management. “It’s an opportunity that was not there previously that could really make a big difference for activist investors.”

Several community banks have activist investors standing pat below 10% ownership, said private investor Phil Timyan. Those shareholders could boost their holdings once the new rule kicks in.

Timyan said he expects activists to buy more shares in banks such as Malvern Bancorp in Paoli, Pa.; Bankwell Financial Group in New Canaan, Conn.; Wayne Savings Bancshares in Wooster, Ohio; and Bank of the James Financial Group in Lynchburg, Va. He said FFBW in Brookfield, Wis., where Arles Advisors owns stock, is another candidate for more activism.

“It will be interesting,” Timyan said. “Activists are going to have much more power — that’s for sure.”

Calls to those banks were not immediately returned.

Activism is an vital tool for corporate governance, said Cooper, whose firm is involved in a dispute with First United in Oakland, Md.

“I think you’re going to see shareholders revolt in some cases,” Cooper said.

Not everyone thinks the new rule will imperil the leadership of smaller banks.

“Bank holding company rules tend to protect banks from outside control pretty well,” said Steven Sugarman, a former CEO at Banc of California and founder of Capital Corps in Irvine, Calif.

Capital Corps is sparring with Broadway Financial in Los Angeles over the lender’s strategic direction and its board's decision to enact a shareholder rights plan that created roadblocks for investors interested in boosting their stakes.

The Fed's rule could benefit smaller banks by encouraging more investment by institutional investors and company insiders, said Tom Thiel, president of JWTT in Portland, Ore. He said the change should keep filing fees and legal costs in check.

“I know of one bank in particular that had a few directors inadvertently go over the 9.99% threshold and were forced to quickly choose to either file with the Fed or sell their positions to get below the cutoff,” Thiel added.

An influx of more investment could also push bank stocks higher, especially at thinly traded companies, DelMonte said.

Cooper, however, said he doubts the rule change to lead to a flurry of new investment.

“Nobody is going to buy more shares just because they can,” he said.

The clarified framework could also help banks line up fintech partnerships by providing guidance on how to structure those arrangements to avoid BHC implications, industry experts said.

”We believe this rule is being implemented to lower the cost of capital raises for banks as well as allow greater partnerships with nonbank financial service businesses,” said Ed Mills, a managing director at Raymond James.