SAN DIEGO--(BUSINESS WIRE)--Commerce Street Investment Management (“CSIM”) sent the following letter to J.P. Gough, Chairman, President and CEO of Orange County Business Bank (OTCQB: OCBB), on the morning of Feb. 9, 2015. CSIM is the manager of three private equity funds that invest growth equity in community banks. Service Equity Partners, LP, one of the funds managed by CSIM, is one of the largest, non-inside shareholders in OCBB and has been invested in OCBB since 2004.
February 9, 2015
Mr. James Peter Gough, Chairman, President & CEO
Orange County
Business Bank
17901 Von Karman Avenue
Suite 100
Irvine,
CA 92614
Dear Mr. Gough:
We received your January 12, 2015 response to the concerns expressed in our December 9, 2014 letter to the Orange County Business Bank ("OCBB" or the “Bank”) Board of Directors. Your response stated that the Board "does not at this time believe a meeting [with Commerce Street Investment Management] would be productive or appropriate." Your rejection of our request, without any substantive explanation, is in fact unproductive and inappropriate given your fiduciary duties as directors of a publicly traded company.
After reviewing the January 29, 2015 OCBB earnings release, the team at Commerce Street Investment Management (“CSIM”) has noted the continued subpar performance and overcapitalization of OCBB. In addition, our concerns have been further heightened because of the misleading presentation of the Bank’s 2014 performance in this earnings release. We believe this earnings release should have informed OCBB investors of the following:
- OCBB’s fourth quarter 2014 pre-tax net income was $190,000 – on an annualized basis, this is a 37 bps pre-tax ROAA (this excludes the $4.644 million one-time recovery of the Bank’s deferred tax asset in this quarter). Tax-effected at 40%, this is equivalent to a 22 bps ROAA for the fourth quarter 2014.
- Excluding the one-time special allowance release of $1.922 million related to a loan recovery in the third quarter 2014, OCBB’s 2014 pre-tax net income was $613,000 – this is a 31 bps pre-tax ROAA (this excludes the $4.644 million one-time recovery of the Bank’s deferred tax asset in the fourth quarter 2014). Tax-effected at 40%, this is equivalent to a 19 bps ROAA for 2014.
We believe the metrics above accurately reflect OCBB’s 2014 fourth quarter and annual operating profitability, and are a strong indicator of the Bank’s future performance potential.
To address OCBB’s performance related issues, our December 9 letter requested the Board’s consideration of the following recommendations:
- Retention of a recognized bank advisor to evaluate an auction of OCBB and other methods to maximize shareholder value (e.g., special dividend, share repurchase);
- Reduction of CEO salary by 35%, and reduction of salary for the next three highest compensated officers by 25%, to bring executive compensation in line with industry peers;
- Retention of a bank compensation consultant to evaluate the entire compensation structure for all OCBB employees; and
- Bifurcation of the Chairman of the Board and CEO roles, and the nomination of an independent member of the Board to the position of Chairman.
Service Equity Partners, LP, a private equity fund managed by CSIM, has been an investor in OCBB since 2004. CSIM has patiently supported the OCBB management team in the 10+ years that the Service Equity Partners fund has been a shareholder. The Board's unwillingness to open a dialogue given the Bank’s subpar performance, overcapitalization, excessive executive compensation, and failure to initiate a strategic plan designed to maximize shareholder value demonstrates the dismissiveness of this Board to the owners of OCBB.
Thus, CSIM will, on behalf of Service Equity Partners, offer shareholder proposals to all shareholders in OCBB’s 2015 proxy materials. We believe our only recourse is to go directly to OCBB shareholders in order that they may consider the merits of our four recommendations in an open forum. We will also send you materials that indicate our intent to nominate up to three candidates for election to the Board of Directors at the 2015 Annual Meeting of OCBB Shareholders.
We regret that you have rejected our collegial efforts to address issues so vital to the creation of shareholder value, but the status quo at OCBB is no longer tolerable to your outside investors.
| Sincerely, | ||||||||
| Mark R. Ruh, Managing Director | Thomas J. Lykos, Managing Director | |||||||
About Commerce Street Investment Management
Commerce Street Capital, LLC (Member FINRA/SIPC) and Commerce Street Investment Advisor LLC (“CSIA”), dba Commerce Street Investment Management (“CSIM”), are wholly-owned subsidiaries of Commerce Street Holdings LLC, a Texas limited liability company. The firm is headquartered at 1445 Ross Avenue, Suite 2700, Dallas, TX 75202. CSIM provides asset management services for private equity and credit opportunity funds which invest in bank and financial institution-related transactions.
This press release is for information purposes only and does not constitute a solicitation or offer by Commerce Street Investment Management to buy or sell any securities, futures, options, foreign exchange or other financial instrument or to provide any investment advice or service.