Ruling in N.J. proxy fight thwarts bank's commercial lending ambitions
An activist investor’s legal victory in New Jersey has created a potential roadblock for mutual banks looking to make more commercial loans.
New Jersey Superior Court Judge Frank Covello ruled on July 31 that an application by Spencer Savings Bank in Elmwood Park to convert from a state savings association to a state savings bank will need an independent review to “safeguard the voting rights of members.”
Covello determined that Spencer Savings' initial conversion plan was “pretextual and primarily aimed at entrenching the board.”
The decision favored longtime bank investor Larry Seidman, who claimed that the conversion was part of a strategy to bar him from seeking representation on the $3.2 billion-asset mutual’s board. Under New Jersey law, directors of state savings banks are appointed by the board and are not elected by members.
The ruling could have broader implications for mutuals if independent reviews are required for other charter conversions, industry observers said.
The conversion would have freed Spencer Savings from a federal law limiting commercial loans as a percentage of a savings association’s assets. Savings banks have more flexibility to make business loans.
“The decision is disappointing because the bank had a really good business purpose for the charter flip," said Kip Weissman, a lawyer at Luse Gorman in Washington.
"The idea of an independent counsel is very unusual," Weissman added. "The concept that an institution can't do a legal and permissible transaction when there's a legitimate business purpose is jaw-dropping. ... The only explanation is [the court] didn't trust the bank and the dispute was personal."
Requiring independent reviews could give aggressive investors a forum to object to charter conversions, said Douglas Faucette, a lawyer at Locke Lord who represented Spencer Savings and serves as counsel to America's Mutual Banks, a trade association.
For now, the ruling will likely force Spencer Savings to curtail efforts to boost commercial lending, and it could deter other mutuals from pursuing charter conversions, Faucette said.
Faucette argued in court that Spencer Savings’ planned conversion was guided by business considerations, rather than a desire to block Seidman.
Spencer Savings has been shifting more resources to commercial lending, more than doubling the size of its portfolio since the end of 2016. The mutual earned $7.8 million in the first half of 2020 after reporting $17 million in profit last year.
Its 0.56% return on assets in 2019, while less than half the industry average of 1.29%, was consistent with other mutuals, according to data from the Federal Deposit Insurance Corp.
Covello noted in his ruling that “legitimate business reasons” exist for Spencer Savings’ conversion. But he also determined that the board is “entirely controlled" by Chairman and CEO Jose Guerrero and that “there is no possibility that the malice … Guerrero holds towards Seidman allowed him to operate in good faith.”
Acrimony between Seidman and Spencer Savings goes back more than a decade.
Spencer Savings filed a lawsuit against the dissident investor in 2007, accusing him of trying to gain control as part of an effort to force the mutual to go public. Five banking trade groups, including the American Bankers Association, filed briefsin support of Spencer Savings. Seidman legally clashed with Spencer Savings again — in 2013 — over the mutual's ability to control the process for director elections.
Seidman, for his part, said he is just pushing for much needed reforms. A longtime depositor, Seidman said he was initially concerned about reports of wasteful spending. Now he is worried about the amount of influence held by Guerrero, who has led the mutual since 1995.
“My purpose now is corporate governance,” Seidman said in an interview. “Jose Guerrero should be working for the board, not the board working for Jose Guerrero.”
Seidman, a well-known gadfly for boards and management teams, has been a director at more than a dozen publicly traded banks. In recent years, he has shown more of a willingness to work with executives and directors rather than butt heads with them.
Seidman recently became a director at the $2.1 billion-asset Bankwell Financial Group in New Canaan, Conn., where he was nominated by the board and received overwhelming shareholder support — securing more votes than any other nominee — for an initial one-year term.
The investor has no love for the mutual form of ownership. While he could eventually try and push Spencer Savings to become a stock-owned company, Seidman said he is in no hurry to force the board’s hand.
“I’d have to be on the board for a period of time” to evaluate a stock conversion, Seidman said. “That has never played into my determination on this case.”
A Spencer Savings spokesman said the mutual is weighing its options, including an appeal, which could drag the battle out. In the meantime, Seidman is pressing ahead with an effort to gain two board seats, going as far as creating a website to champion his cause.
Seidman, meanwhile, is demonstrating little inclination to work with Spencer’s board.
“They should do the right thing, fall on their swords and get out," he said, "but they’re not going to do that."