With First South Bank of Washington, N.C. selling this week, North Carolina loses another homegrown community bank based in a small city. The sale comes after 18 months of efforts to force an ownership change at the company.
In the last year, nine N.C.-based banks have sold or are being sold, all but two acquired by out-of-state institutions. The value of the transactions tops $7 billion, including Carolina Financial Corp.’s $162 million purchase of First South. Carolina Financial operates under the CresCom Bank brand.
Many of those banks, including BNC Bancorp, Paragon Commercial and Yadkin Financial, were top performers by profitability and growth measures.
First South is a different story.
Last year, 46% of First South shareholders supported a shareholder resolution calling for the board “to immediately take the necessary steps to achieve a sale, merger or other disposition of the company on terms that will maximize shareholder value as promptly as possible.” First South’s board initially rejected the resolution, but the Securities & Exchange Commission ruled that it must be considered.
“This year, I think we could have easily gotten over 50%,” says Greenville insurance-company owner Phil Lewis, who filed the resolution. “I think the shareholders will be better served being merged with a high performance institution.”
Lewis held about 149,000 shares, now valued at more than $2.5 million, according to a report he filed as part of his proposal. His filing contended that First South is poorly managed with modest profits, high expenses and an ineffectual board. First South CEO Bruce Elder rejected those criticisms, though the bank has shaken up its board in recent years.
First South signaled a sale could be in the offing when the company’s annual meeting was not held in May, as has been customary. Asked about the delay last month, CEO Bruce Elder declined to discuss the possibility of a sale. He said the delay stemmed from increased complexity in regulatory reporting as the bank reached $1 billion in assets. The bank reported $990 million in assets as of Dec. 31 and $1.04 billion as of March 31.
The sale price of First South is about 50% lower than its peak level in 2006. Profit topped out at $17 million in 2007, then slumped as the recession of 2007-09 hurt eastern North Carolina, slamming the bank’s loan portfolio.
First South reported a $10 million loss in 2012, following a $2 million loss in 2010 and $1 million profit in 2011. Unlike many N.C. banks, First South had enough capital to refrain from participating in the federal bank bailout, called the Troubled Asset Relief Program.
Former CEO Tom Vann, who had led the bank since 1975, resigned in 2012, and the board hired Elder, a former chief financial officer at Crescent State Bank in Cary. Under Elder, First South sold $47 million in troubled loans in 2013, bought nine branches from Bank of America and expanded lending in the fast-growing Raleigh-Durham market.
The ability to expand in the Triangle is of particular importance to Charleston, S.C.-based Carolina Financial, CEO Jerry Rexroad said. First South has $40 million in deposits and two branches in the Raleigh-Durham market.
Carolina Financial expects to cut about a quarter of First South’s total expenses. The Washington-based bank had 283 employees as of Dec. 31.
The combined company is expected to have assets of $3.2 billion, making it the second-largest community bank based in the Carolinas, trailing Southern Pines-based First Bancorp, according to a Carolina Financial presentation.