Activist funds in community bank stocks have a solid track record of success, with 29% of the banks examined eventually being sold and relative outperformance versus the NASDAQ, according to Sterne Agee analysts.

In an industry report dated September 26, 2014, Matthew Kelley and team at Sterne Agee point out most of the banks being targeted remain small and less expensive.

Shareholder activism in community banks

Gleaning through eight investment funds that have filed SEC form 13Ds over the last several years, the analysts highlight that a beneficial ownership interest greater than 5% can be a precursor to a shareholder seeking general corporate or management change in some form.

As can be deduced from the following table, in many cases, these activist funds have a history of running proxy contests to execute changes in management or push for an outright sale of an institution:

Activist Funds in community bank stocks

By further tracking 80 campaigns involving these investors over the last decade from the initial SEC form 13D filing, the analysts point out that these funds have a solid track record of success, with 29% of the banks examined eventually being sold and outperforming the NASDAQ Bank Index which averaged 28 percentage points.

The following table captures the 13D filings and relative performance of the activist funds:

Activist Funds 13D filings

 

The Sterne Agee analysts point out that most of the banks targeted are headquartered in the Northeast and Midwest markets. Moreover, they note the targeted banks remain small at $740 million average asset size and are less expensive with their average price-to-TBV multiple standing at 94%.

Activist funds: Strong insider ownership levels

The SA report also takes a closer look at some of the companies with current 13D filings and solid insider ownership levels. The following table reflects banks where current activist investors are involved with market capitalizations greater than $100 million:

Current Activist Funds campaigns

The analysts note the current insider ownership percentage can often be a marker of banks more likely to sell.

Kelley et al also point out most of the banks targeted are headquartered in the Northeast and Midwest markets. The analysts note in the Northeast, Metro Bancorp Inc (NASDAQ:METR), Orrstown Financial Services (NASDAQ:ORRF) and Hudson Valley Holding Corp. (NYSE:HVB) have solid franchise value, especially from a funding perspective. Moreover, they trade below 150% of tangible book value.

In the other less expensive companies with relatively clean credit profiles and solid deposit franchises, the analysts prefer Peapack-Gladstone Financial Corp (NASDAQ:PGC), Fox Chase Bancorp, Inc. (NASDAQ:FXCB) and Ocean Shore Holding Co (NASDAQ:OSHC). The following table captures community banks with clean asset quality where some of the activist funds are also involved:

Activist Funds Small caps with clean asset quality