South Street Prevails in N.C. Proxy Battle

South Street Financial has survived a tight proxy battle with one of its biggest shareholders — barely.

A slate of directors supported by the Albemarle, N.C., company received 48% of the votes cast at Monday's annual meeting. Mark Jaindl, a Pennsylvania banker who had proposed three board nominees, conceded in an interview Tuesday morning. Jaindl said his slate of nominees received roughly 45% of the votes.

"We came up a little short," Jaindl said, adding that the margin was less than 100,000 votes. "Both proxy solicitors said it was the closest vote they have ever seen. From our standpoint it is disappointing, but on the other hand there are a lot of people in Albemarle who would like to see some fresh views on the board."

A call to Ronald Swanner, South Street's chairman and chief executive, was not returned.

Though South Street, with assets of $281 million, is small, its story is being repeated in many markets. Investors are starting to lose the patience they showed for so long after the financial meltdown and are demanding more prospects for return.

The thrift company's annual meeting lasted just 14 minutes on Monday morning. But representatives for South Street and Jaindl spent most of the afternoon parsing over ballots. More than 87% of the company's outstanding shares were voted in the election.

"People understood where I was coming from but they wanted to give management another chance to get this thing righted," said Jaindl, chairman and CEO of American Bank in Allentown, Pa. Jaindl, who owns about 22% of South Street's stock, has said repeatedly that the investment is separate from his management of American.

"If things don't improve over the next year, I will certainly get more support," Jaindl said, adding that another proxy contest was "one of many options" going forward. "I am a large shareholder, and I think they realize that I will be around for a while," he said.

A day earlier, Jaindl took a civil approach toward the board and Swanner as he sought three of the company's seven board seats, including one for himself.

"I have really tried over the last three years to convince Mr. Swanner to give me a seat on the board," Jaindl told those in attendance. "I think I have sent enough memos and letters to everybody outlining my issues with the company. … I just hope we can work together to make South Street a much better financial institution."

Another shareholder was more aggressive, pressing Swanner to explain South Street's deteriorating credit quality and the board's rationale for rejecting an offer from Jaindl to buy the company for $8.25 a share. "I think that would have been in my interest," the investor said.

Banks across North Carolina have been selling at an average of 65% of tangible book value, Swanner said, suggesting Jaindl's offer appeared to be more generous than that and could have fallen.

"We're not sure what the ultimate price could be," Swanner said. "It was our impression that it could be less than [$8.25 a share]. Right now, bank stocks are on the low, and the prospect for growing the value of the company is ahead of us."

The relatively tame meeting contrasted with the fireworks that took place in prior weeks, as Jaindl, Swanner and South Street's board exchanged jabs. In one of his letters to shareholders, Jaindl noted that the company's nonperforming assets had hit $20 million last year, compared with $988,000 in 2008. "[Nonperforming assets] have gone down on a national basis, and theirs have gone up dramatically," he wrote.

South Street's board shot back in the company's proxy filing, declaring that Jaindl had provided a "selective" and "misleading" summary of its financial condition. "The full, complete and truthful story is that your bank has weathered the storm, has retained its financial strength and is on the road to realize … the benefits of its conservative approach," the filing said.

The proxy also made it clear that directors believe that Jaindl wants to sell the thrift, noting that Jaindl and his late father had invested in several banks — Pennview Savings, Flagship Financial, First National Bank of Allentown, Pen Argyl National Bank and Massachusetts Fincorp — that were eventually sold.

In the case of Mass Fincorp, Jaindl filed a lawsuit in Delaware Chancery Court in January 2000 against the Boston company and its board, contending that they had amended corporate bylaws to prevent him and two associates from becoming directors. At the time, Jaindl and his family owned nearly 10% of the thrift's stock. In April 2002 Mass Fincorp agreed to sell to Abington Bancorp.

Jaindl "did not select your company for the purpose of serving as a guardian of stockholder interests," South Street said in its proxy filing. Rather, the investor and his associates "selected your company as a vehicle to serve their interests."

South Street also contrasted its business model with that of American Bank. "It operates from a single office and seeks Internet deposits from customers across the country," the filing said. "Your bank serves Albemarle, Stanley County and communities in surrounding counties. We ask for deposits from, and make loans to, neighbors, friends and other folks in our communities."

Representatives for Jaindl and South Street aggressively contacted shareholders in the weeks before the meeting. "Jaindl called me a half dozen times," said Jacob Ludwig, an investor who owns several thousand shares in South Street. In addition to deteriorating credit quality, Jaindl expressed concerns during those conversations about the benefits and salaries for the company's top managers. "He told me that he had the votes to pull this out."

Executives at South Street also called Ludwig. "They essentially told me that I shouldn't want a Northerner — a carpetbagger — coming down to run the bank," he added.

Other shareholders were candid about their views of the company following the meeting. "They haven't had to write off as many loans as other banks," John Chapman, a shareholder in Savannah, Ga., noted.

"But shareholders have to be rewarded," Chapman added. "My hope is that, after this, they reinstitute a dividend."