Greenville investor Phil Lewis is seeking to shake up First South Bank, a Washington, N.C.-based community bank that has provided a lucrative ride for its longtime directors amid the banking industry’s struggles. First South, with assets of $885 million as of Dec. 31 and a stock trading at a price little changed from 15 years earlier, pays its directors as much or more than their peers at much larger institutions.
Lewis in December asked First South to support his 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,” according to a filing with the Securities & Exchange Commission. After the bank’s board responded with a “no thanks,” Lewis appealed to the Securities & Exchange Commission, which on March 4 ruled that the resolution must be considered at First South’s annual meeting, typically held in May.
Following the SEC decision, First South’s board on March 16 sent a response to shareholders, calling Lewis’ measure “ill-advised and unwarranted.” The letter noted that approval of the proposal could cause uncertainty about the bank’s future, undermining relationships with customers, employees and communities.
The bank will respond to the shareholder proposal in its annual proxy statement to be filed with the SEC on or about April 15, First South CEO Bruce Elder said in an interview. That document will also announce the bank’s annual meeting date.
Elder declined to discuss Lewis’ criticisms, noting the bank’s response would be included in the proxy statement. But he rebuffed Lewis’ assessment of the bank’s directors as lacking banking expertise. “The board has navigated various economic conditions that the bank has faced over the last decades. To say there is no experience is misguided.”
Lewis, who has owned an insurance company in Greenville for more than 25 years, holds about 149,000 shares, now valued at more than $1.2 million, according to a report he filed as part of his proposal. The filing contends that First South is poorly managed with modest profits, high expenses and an ineffectual board.
In recent years, First South has increased the maximum age of a director from 70 to 85, enabling directors Linley Gibbs Jr. and Frederick Howdy, both 84, and Charles Parker, 79, and Marshall Singleton, 76, to remain on the board, Lewis said in an interview. The bank’s six directors each received fees of $45,000 to $55,000 in 2014, while three — Parker, Singleton and Frederick Holscher, 67 — received additional deferred compensation totaling about $150,000, according to the most recent filing.
By comparison, Southern Pines-based First Bancorp., triple the size of First South, pays about $23,000. Dunn-based Select Bancorp, which is slightly smaller, pays its directors about $12,000 to $21,000, based partly on meeting attendance. The State Employees’ Credit Union, with more than $30 billion in assets, pays nothing except lunch or dinner expenses.
Lewis also criticizes retirement plans that are enabling larger gains for First South’s longterm directors. Holscher, 67, deferred about $292 in monthly fees for six years, or about $21,000, the company’s most recent proxy shows. Under the agreement, he is entitled to about $435,000, payable in 120 monthly installments that started when he turned 65. Under a separate plan, he deferred about $21,000 from 1994 through 1998. By the time he reached 65, he was eligible for about $490,000 over 10 years. A third plan pledges $240,000, giving him a cumulative benefit of more than $1.1 million. Other longtime directors at First South have similar arrangements. Holscher, a lawyer in Washington, N.C., has been on the board since 1985.
First South’s arc mirrors many North Carolina community banks, except it has remained independent while several others with assets of less than $1 billion have sold out to larger rivals. The bank’s share price increased about sixfold between 2000 and mid-2006 as former CEO Tom Vann gained a reputation as a conservative lender. Profit peaked at $17 million in 2007.
But the ensuing recession hammered eastern North Carolina, and First South’s loan portfolio proved to be less than rock-solid. Vann, who had led the bank since 1975, retired in 2012. First South reported a $10 million loss that year, 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.
To replace Vann in 2012, the board hired Elder, a former chief financial officer at Crescent State Bank in Cary. Crescent is now part of Raleigh-based Yadkin Financial.
Under Elder, First South sold $47 million in troubled loans in 2013, reinstated a quarterly cash dividend of 2.5 cents per share, bought nine branches from Bank of America, added two younger directors and expanded lending in the fast-growing Raleigh-Durham market. The quarterly payout had been 20 cents per share before the financial crisis.
While the bank’s profit increased 15% to $4.7 million in 2015 from a year earlier, its profitability remains below industry averages and its 83% expense ratio is higher, Lewis said in his shareholder proposal.
“The last three years of proxy statements (2012, 2013, 2014) show the Bank has had a net loss of $900,000, while directors and senior management were paid over $7 million [including a payout to former CEO Vann.] That is why I feel like the resolution is timely and needed,” Lewis said.
First South’s potential is apparent to some Wall Street investors. Four hedge funds, including one led by veteran bank investor Jeffrey Gendell, are among First South’s 10 largest holders, according to Yahoo Finance. Those 10 investors controlled more than 17% of the bank’s shares as of Dec. 31, while the bank’s officers and directors held 12%, according to the proxy.
