This man brings a broom when he buys into a bank
By Steve Daniels February 25, 2013
New 0 0 0 Print | Email | 0 comments
If you're a banker, John Palmer is the scariest ex-accountant you're ever going to see.
The principal and co-founder of Naperville-based PL Capital LLC specializes in investing in small and midsized banks and then agitating for changes like management overhauls or sales. He sees nothing but opportunity among the wheezing industry survivors of the Great Recession.
His latest target is close to home: Burr Ridge-based BankFinancial Corp., the area's largest thrift, with 20 branches in the city and suburbs and $1.5 billion in assets. PL Capital disclosed on Feb. 14 that it paid $7.8 million for a 5.5 percent stake in BankFinancial, making the bank the third-largest holding for the $160 million-asset firm, which owns about 40 bank stocks.
In a Securities and Exchange Commission filing, PL Capital says that BankFinancial is undervalued and that it will monitor CEO Morgan Gasior's performance “and, where needed . . . assert PL Capital Group's shareholder rights.”
But Mr. Palmer's vision for BankFinancial is pretty clear: a sale. “We see it as a good strategic fit for someone down the road,” he says.
A representative for Mr. Gasior says he has no comment.
BankFinancial, a former mutual thrift that went public eight years ago and is trading at 80 percent of its initial public offering, is only the latest local bank to feel the heat from Mr. Palmer. After a proxy contest in 2010, he won a board seat at the Munster, Ind.-based parent of $1.1 billion-asset Citizens Financial Bank, which has branches in Chicago's south suburbs. A year later, the long-serving CEO of the bank retired from the post. The stock rose 46 percent in 2012.
Mr. Palmer says he has more underperforming targets than money to invest. His firm is soliciting new investors and would like to amass up to $350 million in assets.
“Don't underestimate management teams and their desires to get their paychecks at the expense of shareholders,” Mr. Palmer says.
But times are changing. “Many (bank CEOs) are being held more accountable by their boards,” he says. “In the end, I think it's healthy. . . . Management teams that can't adapt are going to be shown the door.”
BANKS: 1, PALMER: 14
PL Capital doesn't assume that all the banks it invests in must sell. Mr. Palmer says the firm makes sure to offer managements and boards a blueprint to remain independent. But that almost always entails painful cost-cutting, and CEOs often decide that selling the bank is preferable, he says.
' It used to be a great job to be a thrift CEO. You had a lot of capital, you got paid a lot and you didn't have to do much.'
— Brian Martin, bank analyst,
FIG Partners LLC
Of the 15 proxy contests PL Capital has waged since its inception 17 years ago, it has lost only one, in Rhode Island. Others it either won, or management and their boards settled.
“It used to be a great job to be a thrift CEO,” says Brian Martin, bank analyst at FIG Partners LLC in Chicago. “You had a lot of capital, you got paid a lot and you didn't have to do much. The world has changed now. And guys like John Palmer just make it that much harder for these CEOs.”
Mr. Palmer, 52, grew up in the Detroit suburbs but decided not to follow his father and brother into the automotive industry. He began his career as a CPA in Detroit at KPMG Peat Marwick, mainly auditing small banks. Over time, that turned into a role advising small lenders on mergers and acquisitions. In 1995, he and fellow CPA Richard Lashley, who is based in New Jersey, formed PL Capital with just $1 million to invest.
Since then, the company has generated an average annual return of 11 percent.
“Don't ask me why, but I always wanted to go into public accounting,” Mr. Palmer says. “Math was my thing.”
And the math in the banking industry is pretty simple. Even after decades of ruthless consolidation, more than 7,000 U.S. banks remain. Too many banks are chasing too few borrowers, he says.
DEALMAKING FRENZY AHEAD
With about 170 banks, the Chicago market is particularly crowded and ripe for consolidation, he says. He's among the many who predict a frenzy of dealmaking in Chicago and nationwide over the next decade.
But sometimes managements and boards need a push, he says. Even though running a bank isn't nearly as easy as it was before the housing meltdown caused many small lenders to fail and put countless others on life support, there often still is resistance.
For proof, look no further than far northwest suburban Harvard, where Joseph Stilwell, a New York-based shareholder activist, failed to win a board seat last year at Harvard Illinois Bancorp Inc., a small thrift holding company. Mr. Stilwell argued that the thrift's CEO earned more than the bank's profit in 2011, but the bank fought back, arguing that outsiders were trying to wrest away a local pillar. Shareholders backed manageme