One of the areas I track very closely on a regular basis is activist campaigns. Activist investors do not always win the day, but when they do the returns can be quite high. In the small bank area, we have always been aware of the influence of activists and the excess returns they create. There are a few interesting campaigns going on right now in the industry.
I sold my Banc of California (BANC) last year, when the price to book multiples got too high for my taste, but the stock is attracting more attention from its larger investors. I may have to jump back into the stock on further weakness. PL Capital has had an activist stake since 2014 and has asked on several occasions for an investigation into the bank's corporate governance policies and potential improprieties by management and board members. The activist firm has 6.9% of the stock and last month announced it would be nominating tow members to the board.
Now it has some company. Legion Partners Asset Management and the California State Teachers Retirement System have combined to accumulate 6.3% of the bank and expressed "serious concerns with the Issuer's corporate governance, including the extent of related party transactions that appear, to the Reporting Persons, to be largely unchecked by the Issuer's independent directors. In the Reporting Persons' view, such related party transactions evidence substandard corporate governance and make the Reporting Persons question whether the Issuer's Board of Directors (the "Board") is making decisions for the benefit of insiders rather than for the benefit of all stockholders." The filing also noted that the stock is undervalued compared to its peers and has badly underperformed. They want the bank to add some new directors and hire an independent financial advisor.
They also want the bank to form a special committee to consider all strategic alternatives, including a sale. Using my dull pencil, it looks to me like the bank would be worth somewhere between 50% and 100% more than the current stock price in a takeover. I haven't jumped back in just yet, but on any further price weakness, that will change.
There is a fascinating quarrel going on between Joseph Stilwell and HopFed Bancorp (HFBC) . The directors at HopFed sent Mr. Stilwell a letter expressing disappointment that his firm's representative had not taken the bank up on an invitation to meet with CEO John Peck and attempt to work out their differences. They said in the letter: "We acknowledge our Company has work to do, and we are confident HopFed is headed in the right direction. But these misguided personal attacks at a minimum distract our management team and the Board of Directors, taking away from the important work of enhancing shareholder value. Mr. Peck has our full support. We stand behind him and our management team. At the same time, we welcome constructive dialogue as we strive to improve our company."
They made reference to the fact that the bank has been able to grow assets since Mr. Peck took over. The letter noted that the bank increased from $230.0 million in total assets in 2000 to total assets of $871.9 million today. That is an increase of 279% under Mr. Peck's leadership.
Mr. Stilwell is known for sharp letters to bank boards and management, and his reply did not disappoint. He wrote to the directors saying: "I'll address the items from your letter in the order you raised them. First, you seem to be misinformed regarding Megan Parisi's exchanges with John Peck. To elaborate on Megan's refusal to meet without first hearing Mr. Peck's proposal(s): we've been offered 'greenmail' by Mr. Peck twice -- which is once more than we're used to, and we found that distasteful, nay, offensive. Megan was trying to avoid another meeting where Mr. Peck offered us 'greenmail' again, and given our experience with Mr. Peck, I believe she made a fair demand before meeting. "
"Second, any fool can grow a bank substantially in asset size over 16 years. The fact that you equate asset size to 'enhancing long-term shareholder value' -- as opposed to per share book value or per share earnings or return on equity or return on assets -- is perhaps why you don't understand what a truly poor job Mr. Peck has been doing."
He has been calling for a sale of the bank for some time. Once again, my quick, dull pencil calculation indicates an upside of at least 50% in a deal. The bank's proximity to the red-hot Nashville market could make it a very attractive target if it were put on the block. I own this and I think you can buy the stock here, as the shareholder list contains other bank stock activists and specialists who are likely to vote for a sale if push comes to shove -- and with Mr. Stilwell, it often does.