Officials at Somerville-based Central Bank maintain the $420 million-asset institution will not be sold, despite pressure from one group of shareholders.

It’s getting nasty.

For the third week in a row, volleys have been exchanged via the Securities and Exchange Commission in what’s shaping up to be a battle between a local bank and investors who think it should be performing much better for the benefit of its shareholders.

According to executives at Central Bancorp of Somerville, the fact that a group of investors was planning on calling for the sale of the bank came as a surprise.

Over the past several months, PL Capital of Naperville, Ill., and various partners acquired 5.5 percent of Central’s stock. PL Capital is owned and managed by Richard Lashley and John Palmer, who are also partners in the investment firms Financial Edge Fund and Financial Edge Strategic. Palmer and Lashley are also partners with Garret Goodbody, a principal of Goodbody PL with offices in Naperville and a general partner of Archimedes, an investment firm organized in the Channel Islands with an address in Zurich, Switzerland.

On July 19, PL Capital filed a form with the SEC which stated that as a major stockholder in the bank, it was not happy with the bank’s performance and that Central Bancorp should be sold in the lucrative Boston market.

Central immediately fired back, releasing a statement and filing another with the SEC accusing PL Capital of shady dealings.

“We think, in this economic climate, this isn’t the prudent time to sell,” said William P. Morrissey, senior vice president at the bank. “They have just purchased the stock a short period ago – within the last few months. For them to, without any discussion, without any reports, to say that this is the time to sell the bank [isn’t justified]. We acted on the advice of our investment banker who made a presentation to our board. In his considered judgment, this is not the proper time to sell the bank for the long-term value of our shareholders,” he said.

Late last week, PL Capital filed another form with the SEC, along with an attached letter, demanding Central Bancorp of Somerville issue a new statement that “corrects the false and misleading statements contained” in the original press release.

Less than 24 hours later, on Friday morning, William Morrissey, senior vice president of Central Bank, sent a letter to PL Capital and its partners characterizing their letter as “replete with self-serving inaccuracy.”

But Palmer said that a bank which has been publicly traded for nearly 15 years should be returning about 15 percent on equity instead of the 5.5 percent return claimed by Central. Net income declined from 53 cents per diluted share for the fourth quarter of 2000 to 32 cents for the second quarter of 2001. According to the bank’s quarterly report, the earnings decrease is mostly attributed to acceleration of loan payoffs and refinancings as borrowers sought to benefit from lowered interest rates. Additionally, the second-quarter report stated the company intentionally slowed its lending in the first half of the year, as many companies did, in anticipation of a slowing economy. Stock prices for the company have increased steadily from a Jan. 1 price of $16.75 per share to an Aug. 2 price of $23.61.

In his Friday morning letter, Morrissey wrote, “You feign unhappiness with the bank’s performance only having recently bought your shares for the purpose of raising a cry of ‘sell the bank.’ If you were truly unhappy with performance, you should never have bought, or should sell your shares, not the bank.”

One industry expert said he questions why Central officials are reacting with so much anger. “They [PL Capital] only own 5.5 percent … It’s stupid,” said Robert H. Smith, who owns Pasadena, Calif.-based Robert H. Smith Investments & Consulting. Smith is the author of “Dead Bank Walking” and was the chairman and chief executive officer of Security Pacific Corp., the nation’s fifth-largest bank before it merged in the 1990s with Bank of America.

Although it’s not unusual for investors to exert pressure on a company to perform better, Morrissey said calling for the sale of the company without even notifying the bank first was underhanded and, in a way, could be illegal, according to his attorney.

“I think it’s highly unusual. They’ve [PL Capital] approached several banks in the same format. I thought it was very interesting that a group from Naperville, Ill., and the Channel Islands with a mailing address of Zurich, Switzerland, would approach a small community bank that’s been in business for 85 years … Why people from a tax haven in the Channel Islands would be interested in this, I find very, very interesting,” said Morrissey.

Palmer, however, said the group invests exclusively in the banking sector. “We look for under-performing institutions that we believe [have] a significant spread between the trading value and the franchise value and they [Central Bank] came up on our screen. It’s a company that we’ve looked at off and on over the last several years,” he said. As for the Swiss-based Archimedes arm, Palmer said it owns only 3,000 shares. According to the SEC filing, that represents about 0.2 percent of the total 5.5 percent holding.

‘Adverse’ Reaction
In Central’s initial release, it deemed PL Capital an “adverse person,” meaning that the shareholders from PL Capital are seeking to force the bank to take actions not in the best interests of other shareholders or the bank. Thomas J. Dougherty, an attorney with the Boston office of the firm Skadden, Arps, Slate, Meagher & Flom LLP, spoke with Banker & Tradesman during an interview with Morrissey and explained why he believes PL Capital is statutorily prohibited from seeking the sale of the bank.

While not notifying the bank is contrary to common practice, it is not illegal. However, petitioning for the sale of the bank falls under Massachusetts statutes, said Dougherty, who is not related to John D. Doherty, president and chief executive officer of Central Bank.

“They have a choice to make if they’re going to buy more than 5 percent of the shares of a company,” said Dougherty. Under the Massachusetts statutes Chapter 110F, if a company purchased over 5 percent [of a bank’s stock] they must get the consent of the board for any proposal they have in order to proceed with that proposal, Dougherty said. If their proposal is the sale of the bank and they did not seek consent, the statute says there can be no sale of the bank for three years. The only way around the statute, said Dougherty, is to get 90 percent of the shareholders to agree with the proposal. At Central, 10 percent of the stock is employee-owned. “So, arithmetically, having chosen to go over 5 percent, having not obtained the agreement of the board under Chapter 110F, they are required to get 90 percent of all the shares that they don’t own, but including [employee] shares.” Without the employees’ agreement with PL Capital, it is impossible for them to get the required votes, he said.

“Unequivocally not true,” said Palmer of assertion that PL Capital was required to notify the bank of its intentions to ask for a sale. “That’s nothing more than a camouflage technique that they’re trying to use. There’s no requirement at all that we notify them. They’re trying to paint us in the light of a takeover group. We have no intentions of taking over the company,” he said. In the most recent [SEC] form filed on Thursday, the attached letter said that “to suggest that it is a foregone conclusion that [employee stock option plan] shares would be voted against a sale is false and misleading,” since all shares are voted individually and unallocated shares must be voted by independent trustees.

Morrissey said the very public battle has not affected company morale over all. “I think people have full confidence in management and I think it was very indicative and very significant that 97 percent of the shareholders voted last Thursday and over 96½ percent voted for the proposals of management and reelected the directors. That’s a very, very clear signal from our shareholders that management was supported,” he said.

But Palmer scoffed at the results, saying that to take pride in such a result is “naive” at best. “That was an uncontested election. Nobody was running against their directors. When you have an uncontested election, there’s what’s called an automatic broker vote, where the broker houses automatically just vote it,” he said.

“He [Richard Lashley, who spoke with Morrissey before the annual meeting and attended the session] had an opportunity to express his disapproval at the meeting. I announced the vote at the meeting when he was in the audience. He was a potted plant. He made no comments on the earnings, he made no comments on the 96½ percent election of directors. He had owned the stock. He had the opportunity to put a slate in if he so desired,” said Morrissey.

“I think that’s [the vote] an extraordinary demonstration of support for management,” said Morrissey.

Central maintains that it is not for sale. “You also don’t sell your house when property values are down,” said Dougherty.

But Palmer said PL Capital will not shy away from doing what it thinks is good for the shareholders. “Obviously, we’re not pleased with the level of earnings. Quite frankly, [we will] most likely push for a sale of the company because we don’t see another way of maximizing value for the shareholders.”

Smith said if the majority of stockholders are from the community, PL Capital might have an uphill battle to convince them to sell. “If they’re happy with the performance of the bank, they aren’t attracted to some outsider, particularly with questionable pedigree,” she said.

Central Bank has eight branch offices in Arlington, Burlington, Chestnut Hill, Malden, Melrose and Woburn. The bank has $420 million in assets.

New Investors, Bank Officials Feud Over Sale

by Banker & Tradesman time to read: 7 min
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