Despite pressure to sell from one of its largest shareholders, Cape Fear Bank Corp. insists it has studied its options and decided to remain independent.
Chairman, president, and chief executive Cameron Coburn said the $453 million-asset company had hired an investment banking firm that advised the Wilmington, N.C., bank against selling.
"The firm found it would be premature to abandon the bank's long-term plan for success, which most recently was focused on investing capital and expanding the bank's branch footprint," Mr. Coburn said in an interview Tuesday.
Cape Fear is one of a number of community banks targeted by activist shareholders impatient with languishing stock prices. A handful have been forced to sell, including the $3 billion-asset Yardville National Bancorp in Hamilton, N.J., which announced in June that PNC Financial Services Group Inc. would buy it for $408 million.
Yardville was pushed by Lawrence B. Seidman, one of the better-known activists, who also had a long-running battle with the $1 billion-asset Center Bancorp Inc. in Union, N.J., before he won a proxy contest for a board seat this spring. Center announced in May that it was hiring an adviser to consider its strategic options, including a possible sale.
Matt Olney, an analyst at Stephens Inc. in Little Rock, said he expects the trend to accelerate but said investors would be smart to wait until the market for banks recovers.
"The problem they're going to face is, if they want the management team to sell, it's almost the worst time to sell relative to M&A multiples and the number of buyers out there because they're just not going to get the multiple they could have gotten two years ago," he said.
Cape Fear's Mr. Coburn declined to name the investment bank that advised it but said its latest analysis was done after September, when shareholder Maurice J. Koury first contacted the bank with his concerns about its financial performance.
Mr. Coburn said the timing was coincidental. "We have a longstanding relationship with the investment bank. We were constantly evaluating our strategic alternatives."
Mr. Koury, the president of Carolina Hosiery Mills in Burlington, N.C., was out of the country last week and unavailable for an interview, according to his lawyer. But in three letters to Cape Fear, one a month in September through November, Mr. Koury has criticized the bank's long-term performance and questioned Mr. Coburn's compensation.
As of Nov. 5, Mr. Koury owned 227,398 shares, or 6.2%, of Cape Fear's common stock.
"Mr. Coburn, I have grown weary of continued poor performance and inaction on the part of company management and the board," Mr. Koury wrote in his latest letter, which was included in a Securities and Exchange Commission filing. "The time has come for the board to act!"
He urged Cape Fear to "engage an independent investment banking firm to review the company's strategic alternatives, including a possible sale of the company."
Cape Fear's third-quarter earnings fell 35.7%, to $359,000, from the year earlier. Its diluted earnings per share were 9 cents, a 34.3% decrease, and the net interest margin fell 22 basis points, to 3.11%. Noninterest expenses were up 33.4% due largely to $3.2 million of branch expansion costs.
Using the Sept. 14 closing share price of $9.10, Mr. Koury said Cape Fear has returned 43.3% since opening its doors in 1998, or a "very disappointing" 3.99% compounded annually. He said the bank's peers have returned nearly 211% in the same period.
"I imagine that original shareholders could have made a better return in an FDIC-insured CD at our bank," Mr. Koury wrote.
Last week Cape Fear was trading at $10.25 a share, in the middle of its 52-week range.
Mr. Koury also questioned Mr. Coburn's base salary of $250,000, a 27% increase over last year. This amount "represents a salary increase of 385%, since 1998, or 8.9 times the gain in our stock through the date of this writing," Mr. Koury wrote.
In the interview, Mr. Coburn defended his salary.
"My compensation falls well within the customary salary range for the presidency of a community bank of similar size, age, and geographic location," he said.
A 2007 compensation and benefits survey sponsored by America's Community Bankers put the average base salary for a president and CEO of a bank with assets of $300 million to $499 million at $223,600.
Christopher W. Marinac, an analyst at FIG Partners LLC, staked out a middle ground between the shareholder and the CEO.
Though he agreed with Mr. Koury's assertion that Cape Fear "has not delivered sufficient shareholder return relative to other banks," he disagreed in an interview with the dissident's focus on selling the bank.
"Given its current profit base, we think CAPE at best can fetch $12 million," Mr. Marinac wrote in an e-mail sent after the interview.
"It is woefully less than this franchise deserves. Hence, we suggest biting our tongues and encouraging real deposit change at this company, then considering strategic alternatives.
"I really think if Mr. Koury wants to force the sale of the company, that may make him feel good that he won the battle, but he'd lose the war," he saidnthe interview. Mr. Marinac said Cape Fear's main problem is its relatively "immature" deposit base, 73% of which is in costly certificates of deposit. That compares to 53.4% for the average North Carolina bank, he said. Cape Fear's cost of funds, 4.61%, is roughly 100 basis points more than the North Carolina median, Mr. Marinac wrote in the e-mail.
Five of Cape Fear's eight branches were opened in the past 18 months, and Mr. Coburn said this expansion is part of his strategy to reduce the bank's funding costs.
He declined to say how successful the new branches have been in terms of generating core deposits. The bank's total deposits of $381.6 million at Sept. 30 were up 8% for the preceding 12 months.
Mr. Marinac called the bank's new branches a "mixed bag" right now but said they are still young.
Mr. Coburn said the bank is considering other options for cutting its cost of funds, including remote deposit capture. Though he said the branch expansion is just about completed, he added, "If there is an opportunity that fits our strategic plan to enhance our value or our franchise, then we would pursue that."
