Proxy Battle Escalates at First Financial in Washington

A proxy battle at First Financial Northwest (FFNW) has gotten nasty after an activist investor labeled the company's leaders as "idiots" who are "deficient in judgment or lacking in character."

New York investor Joseph Stilwell filed the letter Tuesday as part of ongoing efforts to add his lawyer to First Financial's board. Stilwell has argued that First Financial's executives are overpaid and that the $1.1 billion-asset company should sell itself.

Stilwell's general counsel, Spencer Schneider, briefly served as a director of the Renton, Wash., company, quitting in February after the board refused to implement a series of austerity measures.

Victor Karpiak, First Financial's chairman and chief executive, wrote in a letter Monday that the company has reversed its money-losing ways, maintained healthy capital levels, made changes to get a regulatory order lifted and kept in touch with KBW Inc.'s Keefe, Bruyette & Woods about potential acquisition targets or sale opportunities.

The letters were filed with the Securities and Exchange Commission just weeks before the company's May 24 annual meeting.

Stilwell, who owns 8.5% of First Financial's common stock, has called for the company to reduce nonperforming assets and deleverage, to pay a dividend and repurchase stock.

Stilwell, who also wants Karpiak fired, has been especially miffed about the CEO's compensation. He noted that First Financial lost about $90 million from 2007 to 2011, while Karpiak's pay nearly doubled, to $1 million.

Saying that directors have done a "poor job," Stilwell expressed dismay that directors did not disagree with Karpiak's recent comments that First Financial may soon look to buy other banks. The directors are "either deficient in judgment or lacking in character," he said.

First Financial's board, which has seven directors besides Karpiak, signed the CEO's letter. "We are not opposed to selling the company at a reasonable price," the letter said. "But we are not interested in a fire sale that is not in the best interests of our shareholders."

Stilwell took umbrage with the verbiage. "Only corporate idiots would talk about a 'fire sale'," he wrote. "A redeemable board would direct their fine investment banker — KBW — to solicit bids from all potential buyers to maximize the price."

Karpiak's letter addressed Schneider's resignation. "Stilwell wants us to reimburse him for the cost of his attempt to put his lawyer… back on our board," the letter said.

"We already gave [Schneider] a board seat and spent a lot of time and money in helping him get regulatory approval to be on the board," the directors wrote. Stilwell "wants us to pay his expenses for fighting for something we just gave him — and which he inexplicably gave up."

Stilwell had also nominated himself to join the board but he withdrew last month after the Federal Reserve Board advised him that nominating two directors "under the present facts and circumstances could constitute a controlling interest."

Stilwell also has an outstanding proxy battle with the $170 million-asset Harvard Illinois Bancorp in Harvard, Ill. The company's annual meeting is also scheduled for May 24.