Community banks increasingly grapple with activist shareholders

Shareholder activism at U.S. community banks is on the rise as a handful of factors embolden investors to push for change.

An increasing number of community banks — including Republic First Bancorp Inc., AmeriServ Financial Inc., First Foundation Inc. and Blue Foundry Bancorp — have faced shareholder activism campaigns over the past year as investors push for better performance metrics, board seats or a sale. The increase in shareholder activism comes after M&A slowed to a trickle, stock underperformance at some banks frustrated investors, and new regulatory proxy rules emboldened activists to push for board changes.

"The activist shareholder's ultimate goal is to become a thorn in the side enough that the company buys them out," said Tony Weis, a partner at the law firm Vorys Sater Seymour and Pease. "They're looking to unlock a premium or an increase in their stock price and an exit from the institution."

Shareholder activism on the rise

Depressed stock prices and business underperformance are two main reasons investors will start to apply pressure on a bank, said Richard Grossman, an M&A partner at the law firm Skadden Arps Slate Meagher & Flom.

"Those situations are ripe for activists," he said.

A handful of recent campaigns have focused on underperformance compared to peers, such as Republic First, which faced two activism campaigns in the past year. A recent analysis from S&P Global Market Intelligence found that the bank had the lowest return on average assets, lowest net interest margin, lowest loan-to-deposit ratio and highest efficiency ratio at year-end 2022 among select midsize Pennsylvania banks active in the Philadelphia metro area.

Activist investor Lawrence Seidman's ongoing proxy contest against Blue Foundry Bancorp also centers around performance. Seidman urged shareholders to not approve the company's stock-based benefit plan for senior management and directors until the company improved its performance. Shareholders, however, approved the proposal, and Seidman nominated two directors to the company's board.

Conversely, in some cases, a bank is performing well but its share price does not reflect that performance, which can push activists "to try to unlock some value in that stock that probably has not been reflected in the stock price," according to Weis.

Activism may also be up due to the slowdown in bank M&A, according to Jeffery Smith, a retired Vorys partner who spent 45 years working with smaller financial institutions.

Heightened M&A activity usually creates enough exit opportunities for investors and keeps them from applying pressure on management when bank stocks underperform, but that can change when activity slows down as it has over the last year, Smith said.

"If there's a lot of M&A activity going on, generally, there are opportunities for individuals who've taken a position to find an exit strategy and hopefully, make money in that regard," Smith said. "That tends to be something that keeps them kind of off and away from otherwise leaning on management."

Recent rule changes related to voting in board elections could also contribute to the recent pickup in activism, according to Grossman. In 2021, the U.S. Securities and Exchange Commission adopted new rules related to universal proxy cards in director election contests that allow shareholders to vote for board candidates by proxy.

Those rules have prompted activists to "think they have a bit more of a chance in a contest of getting some of their candidates elected," Grossman said.

Shaking up board composition has become a pronounced area of focus for activist investors more recently, Grossman added.

One serial activist investor has pursued multiple director nominations over the past year. Driver Management Co. LLC successfully added one director to Republic First's board toward the end of 2022 and is trying to nominate directors to multiple banks' boards.

Preparing for shareholder activism

Whatever the reason may be for rising shareholder activism, it is important that banks prepare ahead of time so they are not caught off guard when a campaign happens, Smith said.

Companies preparing for activism should have a core response team ready and maintain a robust and active stock watch program to detect stock accumulations early, Grossman said.

Furthermore, banks should "be their own activists" and try to anticipate how activists will view the company from the outside in, consider whether they should buy back more stock and monitor how the company is trading relative to its peers, Grossman added.

"Make sure you're monitoring who comes on your earnings calls and monitor what I call the 'nontraditional' investor forums, such as the various activism conferences," he said.

Weis recommends companies engage with shareholders and constructively consider their recommendations. Banks can also regularly evaluate their corporate governance to find areas for improvement in order to anticipate activist demands, Weis said.

"If there are areas in your corporate governance documents, your articles or your bylaws that are not consistent with the current industry expectation, you're going to receive scrutiny from activist shareholders," Weis said.

For example, classified boards of directors, in which board members' term lengths are scattered versus a declassified board where all directors are up for denomination in the same year, could be one such area of scrutiny.