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Spencer Bank Struggles Against Activist Investor

Seidman seeks to take mutual savings bank publicAn Elmwood-based savings bank says it is fighting a groundbreaking legal case against a takeover bid by a well-known activist investor. Spencer Savings Bank, a mutual, or financial institution owned by its depositors, has already lost one round to Lawrence B. Seidman in Newark’s federal district court.

Spencer Bank supporters say a loss in a higher court could force waves of depositor-owned banks to convert to publicly held institutions.

“This is a case of first impression,” says Spencer Bank attorney, Douglas P. Faucette, referring to a case that raises new legal issues. “The outcome of this matter has implications for mutual savings banks across the nation.”

Faucette, a partner in the Washington, D.C., office of Locke, Lord, Bissell & Liddell, LLP, is representing Spencer Bank in front of the Third Circuit Court of Appeals in Philadelphia. If things do not go his client’s way, Faucette does not rule out an appeal to the U.S. Supreme Court.

The primary issue is whether or not Spencer Bank can keep Seidman off its board. But the case also raises questions about Congressional intent and whether or not a board really knows what is best for a business.

The bank says that Seidman, a Parsippany-based investor who has fought for seats on the board of directors at more than a dozen other financial institutions, wants to convert Spencer from a mutual model to a stockholder one, presumably so he can get in on the ground floor of a potentially lucrative initial public offering.

“Lawrence Seidman’s attack is not about Spencer, it’s on the mutual industry itself,” José B. Guerrero, Spencer’s chief executive officer, says in an e-mailed message to NJBIZ. “It”s an attack on the only form of ownership that lets small banks keep local decisions local. Mutual banks are accountable to their depositor- and borrower-members; publicly traded banks answer to shareholders who may not even be customers of the bank.”

A host of banking associations from across the country, including the New Jersey League of Community Bankers, the Washington, D.C.-based American Bankers Association and the Indiana Bankers Association, has filed amicus briefs, or statements with the court, supporting Spencer Bank’s efforts to keep Seidman off the board.

Court records indicate that Seidman specifically said he wants to take Spencer Bank public. But Seidman says his opponents are jumping to conclusions.

“I’ve never forced a mutual to convert to a publicly held company,” he says.

Citing the ongoing litigation, Seidman declines to be more specific about his intentions. But he adds that “shareholders do well with institutions that we’ve been involved with.”

Public documents, including filings with the U.S. Securities and Exchange Commission, indicate Seidman has been involved with a variety of independent banks that eventually merged with, or were acquired by, bigger institutions.

Yardville National Bancorp CEO Patrick M. Ryan, for example, had long proclaimed the virtues of staying independent. But observers say his 2007 decision to merge Yardville with PNC Financial Services Group of Pittsburgh was prompted, in no small measure, by pressure exerted by Seidman, a dissident stockholder.

According to court documents filed by Spencer Bank, 16 of the 17 financial institutions approached by Seidman and his associates “have announced agreements to merge with, or to be acquired by, other institutions within one or two years” of Seidman’s initial contact.

While stockholder-owned banks have long been tempting takeover targets, mutual banks say they are a unique kind of institution.

Unlike commercial and other banks that are generally owned by stockholders and may be traded on public stock exchanges, mutual banks are owned by their depositors, and low-balance depositors generally have the same voting clout as big-balance depositors.

The theory behind mutual banks dates back to the 1800s. The thinking was that mutually owned institutions would be more likely to court small depositors and would advance more loans to the local community, since they were shielded from stock-market pressures to turn in high performance.

Yet in the late 1970s, amid increased competition, some mutual banks applied for permission to convert to a stock model as a way to raise capital. Federal regulators grudgingly gave their blessing but conditioned it on giving depositors the right to buy into their bank’s IPO at a level that often proved to be substantially below the public’s price.

Seidman wants Spencer Bank to go public for his own personal gain, according to Faucette.

“Spencer has substantial capital and does not need to go public,” Faucette says. “Attempts like this to influence the board of directors go against laws that were put into place long ago to protect institutions like Spencer.”

The bank has argued that Seidman’s efforts to gain a seat on the board of directors violate the Savings and Loan Holding Company Act of 1967, a federal law that regulates bank-ownership issues.

But that is a smokescreen, according to Seidman attorney Peter Bray, of Bray Miller & Bray LLC in Parsippany.

“In a mutual bank, depositors and borrowers elect the board of directors, who then appoint officers,” says Bray. “Where is it written that management is the only party that can put up a new board member for election?”

When Federal District Judge William H. Walls issued his opinion in January, it sidestepped both questions. Instead, Walls ruled that Spencer Bank did not have the “private right of action,” or standing, to bring a lawsuit under the Savings and Loan Holding Company Act.

That power, says Walls, is reserved for federal agencies like the Office of

Thrift Supervision.

“The decision was not a huge surprise,” says Faucette. “For some years the courts have been chipping away at private rights of action. But we’ll see if the Circuit Court reverses the decision and sends it back for reconsideration. If it doesn’t, we may appeal to the U.S. Supreme Court.”

Some observers would rather see the marketplace make the decision.

“I personally don’t think mutual banks should be given legislative protection against a change in control or status,” says Mitchell Ratner, associate professor of finance at Rider University, whose focus includes banking issues. “I believe that over-regulation has hurt banks before; and constraining a mutual from going public might inhibit its ability to compete against better-capitalized insti-tutions. If you’re a depositor at a mutual bank that goes public, you have the right to buy into the IPO. So what’s wrong with that?”

E-mail to mdaks@njbiz.com