It is only half humorous to think that a dispute over hard candy is contributing to an emerging proxy battle at First Financial Northwest Inc.

Spencer Schneider, who joined the company's board in January, abruptly resigned after just five weeks during a standoff at the company's Feb. 15 board meeting. Schneider quit when the board tabled several of his demands for change, the company said.

First Financial listed three of those demands: remove all pictures of past directors, end a policy of paying ex-directors, and limit refreshments at the annual meeting to hard candy.

Schneider, general counsel at activist investor Stilwell Group in New York, had lobbied since September to join the Renton, Wash., company's board. On Friday, his firm said in a regulatory filing that it plans to vie for more board seats at First Financial's annual meeting.

The catalyst is unusual, but the dispute underscores that dissident investors are back and ready to go toe-to-toe with management teams. As the banking industry enters proxy season, both of those groups are digging in for battle.

"Absolutely this is the time of year when you're going to see proxy fights," said Donald Jacobs, a banking professor at Northwestern University who is also a director at two publicly traded companies. "There is a great increase in activism all over corporate America."

First Financial's management believes a fight was inevitable. Schneider's request to join the board and subsequent resignation were "orchestrated," said Victor Karpiak, the $1.1 billion-asset company's chairman, president and chief executive, in a Thursday interview. "It was a situation where they wanted to launch a proxy fight," he said. "We believe we've performed very well for our shareholders."

Schneider, whose company owns 8.5% of First Financial's common stock and has stakes in at least 14 banks and thrifts, didn't sit quietly and let the company control the story. In a Feb. 16 letter to Karpiak filed with regulators, Schneider wrote that he only wanted to "put the best interests of the Bank and its shareholders first."

Specifically, he wrote that Stilwell Group wanted the company to end its "unprofessional, pompous, sneaky, wasteful, stubborn, and moronic" culture. He complained about decisions to issue iPads to each director and "ornate board rooms bigger than I've ever seen anywhere."

Still, First Financial has improved since a September 2010 consent order required its First Savings Bank Northwest to improve capital levels, reduce problem loans and revise its lending and collection practices. At Dec. 31, the bank's Tier 1 and total risk-based capital levels were 13.54% and 24.76%, respectively. Regulators had required the bank to maintain a Tier 1 capital ratio of 10% and a total risk-based capital ratio of 12%.

The company's fourth-quarter earnings rose 63% from a year earlier, to $927,000. That came after First Financial lost a total of nearly $100 million in 2009 and 2010. Karpiak, who has been CEO since 2007 when First Financial converted from a mutual to a stock company, said the company is turning things around.

"We're turning the bank back to profitability," Karpiak said. "We are a real estate lender and if you're a real estate lender, you've had a tough couple of years."

First Financial's stock hit a 52-week high of $7.48 a share on Feb. 17, rising 27% from a year earlier. Still, it is 36% below where it closed on its first day of trading in October 2007. And the company's efficiency ratio at Dec. 31 was 81%, up from 71% a year earlier, despite a 16% decline in noninterest expenses, to $26.2 million.

Stilwell Group is particularly chafed with Karpiak's compensation, which totaled $3.7 million from 2008 to 2010, when he was "handing staggering losses to the owners," Schneider wrote in his letter. He complained that First Financial's director emeritus program pays retired board members "up to $150,000 for doing absolutely nothing."

Schneider wrote that his requests were meant as symbolic gestures that the company was moving in a new direction. Removing directors' pictures would show that the company "is not a country club or an English manor." Offering only hard candy would show the company's "austerity," he wrote.

Stilwell Group has been focused on convincing management teams to change how they run banks. "Everybody is expecting the old normal to come back, implicitly or explicitly," said Joseph Stilwell, the firm's managing member, during an Oct. 31 roundtable hosted by American Banker. "They haven't settled in yet to the idea that we're in a new world, higher capital requirements, and you can't grow forever."

Schneider would not discuss Karpiak's comments. Rather, Schneider, who was vetted by the Federal Deposit Insurance Corp., the Federal Reserve Board and the Washington Department of Financial Institutions, said in an interview Thursday that the company's board is "responsible for losses to the shareholders exceeding $100 million in shareholders' equity. We are afraid of what they will do if left to their own devices."

To allow for Stilwell Group's request for a board seat, First Financial had amended its bylaws to expand the board's size. After Schneider quit, the company amended the bylaws again to eliminate the extra seat.

Claims by Schneider that First Financial has redundant buildings and personnel are misguided, Karpiak said. "We're near the Renton airport and because of easement issues, we've got one building that houses our branch and another for our back office and lending operations," he said.

Pictures of former directors are hung on a little-used stairwell leading to the CEO's office, Karpiak said. The director emeritus program honors "service for so many years on the board." He said directors are eligible only after serving 15 consecutive years, and the company only pays $10,000 annually for three years.

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