For North Carolina banks in the merger-conversion game, the Sept. 16 vote at Shelby Savings Bank was the shot heard round the state.
CCB Financial Corp., based in Durham, had planned to buy Shelby Savings using this popular dealmaking technique in which a bank buys a savings and loan at the moment it converts from a mutual to a stock institution.
Thrift employees and directors usually win big in these deals, although the bank pays a smaller premium than it would in a standard acquisition.
But CCB's bid for the $100 million-asset thrift ran into a buzz saw.of depositor outrage at the special meeting called for the election.
Too Close a Vote
Shelby's president and CEO, G. Dean Whisnant, called off the proxy balloting when he realized he might not cross the required approval threshold of 50%. "The vote was too close," he said. "We were afraid we could damage the bank and the community."
As Mr. Whisnant and his chastened board explore other options for Shelby Savings, North Carolina bankers are assessing the impact of the controversy that now surrounds merger-conversions.
Two other deals that won depositor approval are being appealed to state regulators. A fourth vote, scheduled for Home Savings Bank of Albemarle early next year, may also face a protest by depositors.
Group Rallies Depositors
An activist group in Raleigh, known as the Community Reinvestment Association, is trying to organize depositors across the state for a broader campaign against merger-conversions.
"The protests are another element that have to be considered in analyzing whether or not a merger-conversion is a route a thrift board wants to take," said Paul Stock. executive vice president and counsel for the North Carolina Alliance of Community Financial institutions, a trade group for thrifts and community banks.
"If you're fainthearted about the whole thing, if you're somewhat ambivalent to begin with, the specter of a substantial amount of criticism may have some dampening effect."
At the very least, experts say, the controversy will nudge acquiring banks to sweeten the pot for depositors, perhaps paying an actual premium for the deposits. Up to now, depositors have usually been offered only a 15% discount on purchase of the acquirer's stock.
Some Change Detected
"Were beginning to see [the deals] change a bit, with more of the consideration going to depositors. That's all good and fine with us," said Cecil W. Sewell Jr., president and chief operating officer of Centura Banks Inc., Rocky Mount.
Merger-conversions have been around since the early 1980s, but were used only by thrifts acquiring other thrifts. The 1989 S&L bailout bill spurred a dramatic surge in these deals by allowing banks, for the first time, to acquire healthy thrifts.
North Carolina, with its large pool of S&Ls, became a hot spot for the financing technique. This was because a change in state law liberalized the conversion rules for state-chartered thrifts.
Wilson-based BB&T Financial Corp., with $8 billion of assets, has been the most active acquirer. It has announced 10 merger-conversions since 1989. absorbing a total of $1.5 billion of assets in the process.
Building Market Share
Other midsize banks in North Carolina have also jumped to convert and merge as a route to building market share in the state.
"Right now, a lot of thrifts are relatively healthy, so when you acquire them, you're not looking at a lot of nonperforming assets. What you're doing is buying a deposit base, essentially," said Ed Dillon, an analyst with SNL Securities Inc, in Charlottesville, Va.
Merger-conversions were un-controversial units this year, when depositors began to complain about the high compensation being paid to managers and directors. It's common in these deals for the thrift managers to receive five-year employment contracts at sharply higher salaries.
Mr. Whisnant at Shelby Savings, for example, would have seen his $109,322 annual compensation more than double next year, to $214,440. CCB also doubled directors' fees, to $1,000 a month.
"As more of these deals have gotten done, the depositors have gotten smarter," said attorney Steve Blalock in Albemarle. "It's taken this long for the depositors to figure out what's going on."
Mr. Blalock, encouraged by the protests in Shelby and elsewhere, is representing a depositors group in Albemarle that plans to protest BB&T's pending merger-conversion of Home Savings Bank, a local thrift with S161 million in assets.
"It's the first [merger-conversion] where we've had any questions raised," said John A. Allison 4th, BB&T's chairman and CEO.
Depositors' discontent is also fueled by the the big premiums earned by shareholders in straight conversions. The average first-week stock gain for thrifts converting in the first nine months of this year was 34%, according to SNL Securities.
Windfall for Executives
Shareholders of Fedfirst Bancshares, Winston-Salem, realized a 400% gain when they sold out last July to Southern National Corp., Lumberton.
"It was just hard for a number of us to accept that this merger-conversion was in the best interests of depositors when the managers and directors stood to gain so much from the transaction," said attorney Larry Wilson in Shelby, who protested the buyout of Shelby Savings Bank.
Defenders of the deal say thrift insiders also reap big gains in straight conversions, but few depositors take advantage of the opportunity to buy stock.
"The average mom and pop depositor, the 90% that don't participate at all, don't get anything out of the conversion process." Mr. Allison said.
Investors Know the Ropes
It's also well known in the industry that professional investors play the thrift conversion game by going around the state making deposits in mutuals with an eye on the eventual buyout.
These investors, called "flippers," stand to gain much more in a straight conversion, where they can buy big blocks of the thrift's stock, than in a merger-conversion, which limits them to a 15% discount on the acquirer's shares.
The Business Journal of Charlotte has reported that two prominent investors in that city, Ed and Charles Shelton, deposited funds in Shelby Savings earlier in the year and attempted to persuade the board to pursue a straight conversion. The Shelton brothers, through a spokeswoman, declined to comment.
There's no question that community resentment of losing a locally owned institution does play a role in the protests. That is what motivated Bruce Byers in Forest City to oppose the recent acquisition of First Savings Bank by Centura Banks.
"It looks like Centura is going to take millions of dollars from our little, relatively poor city," he said.
Longtime Depositor Upset
Mr. Byers, whose company sells propane gas, was inspired by his father, a longtime First Savings depositor who wrote a letter to the local newspaper complaining about the loss of local control if Centura bought the thrift. "My dad's 78 years old, and it was going to put such a load on him I thought I'd better jump into it," Mr. Byers said.
After studying the financials of the transaction, Mr. Byers concluded that insiders were getting a windfall at the expense of depositors. The thrift's president, for example, will receive a 76% raise, boosting his annual pay to $172,832, in the first year of a five-year contract with Centura.
Mr. Byers helped form a depositors' group, which hired two attorneys and took out paid newspaper ads condemning the deal. But the proxy battle went against the protesters, with 75% of depositors approving the deal.
Mr. Byers said his group is planning to appeal to the North Carolina Savings Institutions Division, which regulates state-chartered thrifts. There are also plans to sue the directors of First Savings for an alleged breach of fiduciary duty.
Public Hearing Sought
Such legal activism would not be unprecedented. Less than a week after First Savings depositors approved their merger-conversion, members of Graham Savings Bank in the like-named town voted by a 53% margin to accept a merger-conversion acquisition by CCB.
Attorneys for the disgruntled depositors filed a request on Oct. 4 for a public hearing before the state regulators to ask that the vote be overturned on technical grounds. But the regulators are clearly reluctant to get involved in a squabble between depositors, absent clear improprieties in the voting procedure.
"As a practical matter, once the plans have been approved and voted on by the members, it's basically majority, rule," said David C. Worth, counsel for the savings institution division of the North Carolina Banking Commission.
Experts agree that the future of merger-conversions as an acquisition tool may eventually be decided in court. "Certainly, if there's a court challenge and the court says there's something wrong with the process, that would have a tremendous impact," said Mr. Stock, with the thrift trade group.
But the fact remains that mutually owned thrifts face limited choices: merger-conversion, straight conversion, or staying mutual. The mutual structure makes it nearly impossible to raise capital. Straight conversions may work for some of the larger S&Ls.
But interest rate risk poses a deadly danger to the small thrift with a balance sheet crammed full of fixed-rate mortgages.
For these smaller, less diversified thrifts, a merger-conversion may still offer the best solution.
"An objective analysis of the merger-conversion results in an understanding that it's not a looting of the institution," said Mr. Stock.
According to some depositors, though, it might as well be.