Old Allies Are the Next Big Threat to Small Banks

Family feud may soon be taking on a whole new meaning in community banking.

This week the board of ECB Bancorp (ECBE) in Engelhard, N.C., pushed back against a challenge by the Gibbs family, which owns more than 13% of ECB's common stock and includes a former director. The longtime investors want the chief executive fired and other fixes made.

Disgruntled investors have been on the rise lately, but they have tended to be activist shareholders who bought in to force a change — not longstanding shareholders.

The ECB fight may signal a wave of challenges by family ownership and other longtime investors in community banks who tire of minimal returns.

"There are lots of legacy shareholder groups who have gone through [an] intergenerational transfer of ownership," and "those not having a role in the bank become understandably impatient" with weak results, says Rod Taylor of Taylor & Co., a bank consultant and executive recruiter.

"I imagine we're going to see more of it, especially among smaller community and regional banks that are not going to be able to find an opportunity to sell the bank for a premium any time soon," he says.

ECB made a small profit in the first quarter, but its bottom line has been erratic for more than a year. Its capital also tapered off; its total risk-based capital ratio was 13.7% at March 31, compared to 13.9% three months earlier.

The $917 million-asset company reached an agreement a year ago with several private equity firms to raise nearly $80 million, but the deal fell through in February when one of the lead investors could not get the approval of regulators. ECB said it would seek other funding, but no new agreement has been announced. It also had to cancel plans to buy a several branches from a Virginia bank because of the failed capital raise.

The Gibbs family complained in a regulatory filing last week that the company spent nearly $2 million on the failed effort to raise capital. The deal, had it gone through, would have been dilutive to existing shareholders, it said.

"A leadership change is needed," the family wrote in a letter that accompanied the filing. "Management seems to have totally forgotten the shareholders of this company, and the company is being driven in a disastrous direction."

The family — which includes three Gibbs siblings and their mother's estate — and other investors have ties to the bank that go back to its formation in 1920. Greg Gibbs was an ECB director for 17 years; he resigned in September.

In a response filed Tuesday, ECB's board claimed that while a director Greg Gibbs supported several of the decisions that the family is now criticizing. Those include the private equity deal and the agreement to buy the branches.

ECB's directors declared "unanimous support" for, and "confidence in," the management team, including CEO Dwight Utz.

ECB's stock price had fallen more than 50% since July 1, 2009, when Utz was hired, the Gibbs family's letter said. The family also knocked salary increases for senior executives over the last three years after the company lost money last year.

Utz defended his work in an interview. Since coming here "we have managed through those three years in the worst economic times," he says. "We've worked through the portfolio issues and have been profitable every year with the exception of last year."

The attempted capital raise and branch acquisition prompted the loss last year, Utz says. ECB reported a profit of $377,000 in the first quarter, he noted.

The Gibbs family favors the return of Art Keeney, a former ECB chief executive. Keeney "has indicated a willingness" to take over on an interim basis, the family says.

Keeney, who is also a shareholder, says he has no involvement with the Gibbs family's efforts. However, when the Gibbs asked him about taking on the CEO position, he says he agreed to consider it "for a very interim period."

A looming issue is the $18 million that ECB owes the Troubled Asset Relief Program. The debt to Tarp has hindered the bank's ability to buy other banks or sell itself, Greg Gibbs has said.

Since the capital raise fell through, the board and management team have revised their strategic plan for the next five years and are reviewing Tarp repayment options, Utz says.

It established new risk management procedures and expanded into wealth management, commercial and agricultural lines of business, he says.

"Organic growth market opportunities … are at the core of" the strategic plan, he says. "The big issue here is we see 2012 as a transitional year."

But investors in such cases often want quick satisfaction, Taylor says.

"This is a classic example of the legacy shareholders who are trying to monetize their interest in the bank and professional management who are more focused on longer term growth and profitability," Taylor says. "That always begs the question: is what's in the best interest of the bank from a performance perspective also in the best interest of the shareholders? That's a tough one to answer today."