Since becoming Community Bancshares Inc.'s chairman and chief executive nearly three years ago, Patrick M. Frawley has resolved a slew of lawsuits and disposed of tens of millions of dollars in problem loans.
But if an activist investor has his way, Mr. Frawley will not get the chance to return the Blountsville, Ala., company to full financial health.
Joseph Stilwell, who heads a group that owns 8.5% of Community, said last week that though Mr. Frawley has done a "very good job" fixing the credit-quality, regulatory, and legal problems that have beset Community since 2000, on the bottom line the recovery has been uneven at best.
After losing $11.8 million in 2003, the company earned $1.3 million last year. Its profit through Sept. 30 was about $1.4 million, which works out to a return on equity of just 3.96%.
Mr. Stilwell said he believes the $570 million-asset Community faces years of similarly subpar returns because of its costly expense structure and its asset mix, which is weighted toward investment securities, personal consumer loans, and residential mortgages.
His remedy is to sell the company, and he said that he and two of his associates would seek board seats if Mr. Frawley does not arrange a deal before the 2006 annual meeting. (Community has yet to set a date for its annual meeting; it is usually held in early summer.)
"We're not just saying this bank isn't humming," Mr. Stilwell said. "There's no evidence it is ever going to hum."
He is not the only investor who believes Community should sell.
John W. Spence, who leads a group that owns nearly 9% of the company, said he would like to see it sold to another north Alabama community bank. "There are a number of candidates out there," he said Thursday.
Like Mr. Stilwell, Mr. Spence praised Mr. Frawley and his management team for their work in solving the legal and problem-loan woes. But he said he doubted their abilities in other areas.
"We're indebted to management," Mr. Spence said. "They've done a wonderful job turning the bank around, but I have real strong reservations about their ability to generate a strong return on equity going forward. Nothing that they have said leads me to believe they can do it."
The first indication that Mr. Stilwell was unhappy with the state of affairs at Community came in a Nov. 22 filing with the Securities and Exchange Commission. In the document, he and his investment partners said they "reserved the right" to begin a proxy contest if Community's management did not sell the company.
Mr. Frawley did not return repeated calls from American Banker.
Founded in 1923, Community was a major agricultural lender well into the 1960s, according to Birl Bryson, a longtime resident and the retired principal of the city's J.B. Pennington High School.
As Blountsville evolved and the industrial and service sectors replaced farming as the drivers of the local economy, Community remained profitable. Its best year was 1998, when it recorded net income of $5 million.
Things began to sour the next year because of an increase in problem loans and a scandal involving Mr. Frawley's predecessor, Kennon R. Patterson.
In 2000, Mr. Patterson was accused of allowing contractors working on two new branches to pad their expenses in exchange for improvements to his home. In March of this year he was convicted of bank fraud and conspiracy.
The allegations led to six lawsuits against Community by directors, shareholders, and Mr. Patterson, who sued after he was fired in 2003.
Concurrent with the legal turmoil, Community's asset quality began to deteriorate. Net chargeoffs went from $4.8 million in 1999 to $10.7 million last year.
Community raised more than $18 million in a series of private stock offerings in 2004 and used the money to write off bad loans and settle most of the lawsuits. (Mr. Patterson's suit is still pending, as is one Community filed against him claiming he breached his fiduciary duty.)
Still, Community's recovery is hardly complete. Its returns on assets and equity are well below industry averages, and its efficiency ratio is hovering around 90%.
Allen G. Gilliland, a longtime Blountsville businessman, said that given its recent past he was not surprised about the calls for Community's sale. But he said he would be sorry if the city's only locally based bank got sold to an out-of-town company.
"I'd sort of hate to see that," he said. "It's been here since 1923. I'd like to see it stay, myself."
