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Letter to the Editor: Shareholder urges others to vote 'no' on Level One's $3 offer

November 07, 2012 - Oxford Bank's Directors are asking their shareholders to sell out ownership for $3 per share next week.

"Not very good but better than nothing" is the gist of it.

However, none of it happens without your vote.

Before casting it, please spend a few minutes weighing the following reasons for voting against said merger.

If they change the mind of anyone who has already voted, please contact the Bank immediately.

You have the right to change.

(1) The auto industry is the primary factor: The crash of Oxford Bank's (OB) value (from over $50-per-share down to 10 cents from 2007 to 2010) was not caused by improprieties or trafficking in overly-complex leveraged transactions. It generally is attributed to sudden declines in local real estate values and when the auto industry faltered.

How many families with mortgages in our area lived under daily fear of a pink slip as Chrysler and GM teetered on the edge of bankruptcy? Well, the pendulum has dramatically swung in our favor. Just last week, Chrysler reported an 80 percent rise in third quarter profits.

Based on renewed auto profitability, I believe that Oxford real estate values will rapidly appreciate, as will OB's assets. It's already happening.

Throughout 2012 OB stock has traded between $1.40 to $3.50 (14-35 times above the lows, in under two years!).

If you bought $1,000 of OB stock in 2010 when it traded for ten cents, you'd be selling it now for $30,000 at Level One's price.

Problem is, most of us bought at much higher prices, and are still under water. We need more appreciation. If you accept this logic, why would we want to sell on the cheap, when a substantial rebound is imminent? Doesn't it violate all free market logic to sell when the market is still low, unless you absolutely have to?

(2) The federal government does not want to take over Oxford Bank: Our Directors might respond to this last question as follows: "If we don't sell, the federal regulators will shutter OB and we get nothing for our shares."

The answer is simple. If the feds didn't shutter OB when its share price was ten cents and losing millions, why would they do so now that the share price has risen 30 times over and we have posted 8 consecutive quarters of profit?

You may have read post mortem statements that OB's Tier One ratio is just 4.27 versus the 8 percent required by the FDIC. But the latter number is an inflated requirement of the consent order discussed below. 4% is a minimally acceptable ratio under the Basel I accord.

We have proven there will not be a run on the bank, and are buoyed now by a substantially improved local economy, back-stopped by the government.

The last thing they want is to add our county's oldest bank to the list of local casualties, and shutter an eighth of downtown Oxford.

If the FDIC closes Oxford Bank despite all the progress we've made, pockets the excess value of our real estate to cover their "costs" as Jay Smith said in last week's article, and then expects us to bank with whomever they hand the accounts to…good luck.

(3) Other government issues could be resolved which would improve OB's value:

First, the Bank continues to do business under the FDIC's burdensome consent order.

Since mid-2008 this order (a formal means of requiring reduced risk) has mandated much higher premium payments for OB to insure its deposits, and higher capital requirements (the special 8% Tier One ratio).

I could better understand the FDIC's caution if it hadn't treated another local small bank differently.

In mid-2008, Clarkston State Bank ("CSB") was forced onto a similar consent order. Yet the FDIC has already terminated that order as of Sept 2011 despite CSB netting a $212,000 loss in the three months prior to being released; despite a share price currently diving to 25 cents/shr; despite total assets less than half the size of OB; and despite a "Texas ratio" of 73.57 % at the time they were released.

Compare those numbers with Oxford's (see p. 20-21 of the Summary). How can the FDIC consider CSB "back to healthy" with a 25 cent share price and OB is still under the gun?

A second damaging issue involving the government hangs over this agreement: the pending tax appeal. There seems to be $1 million in dispute and a large special loss reserve to cover it.

The merger specifically provides for nearly a dollar per share of extra payment to OB shareholders from Level One if the claim is favorably resolved. So why not resolve it?

The government should help resolve the tax appeal, if they really want to maximize incentives for OB shareholders to sell.

4. There are reasons to question the main architects of this sale: Please note that the primary sources of professional credibility behind this sale are the buyer Level One, OB President and CEO James Bess, and the fairness opinion from Austin and Associates.

Who is Level One? Advocates of the merger would simply say – it is a bank rated five stars by BauerFinancial. I focus more on the fact they have only been in business five years. They had no mature portfolio of mortgages to deal with when the financial crisis hit, so of course their numbers look better.

But it seems impossible to opine intelligently about their quality of loans or managerial expertise based on such a limited track record.

We do know this – in an interview posted on Level One's own website, their CEO Patrick Fehring is quoted: "We don't have the expertise to do a turnaround," if they were to acquire a struggling financial institution – "even at a bargain." And yet here they are at our struggling doorstep, looking to buy at a bargain with whatever intention.

What about Mr. Bess? He is not a shareholder. He has quite a different financial interest in the deal going through. Level One has agreed to employ him through the end of 2014 under the same terms he currently enjoys.

Additionally, our fairness opinion from Austin and Associates has been secured with a $25,000 payment. They get another $75,000 only if the deal closes (p. 24). What are the chances under that arrangement that their opinion would come back "Not Fair"?

All of the above is not to disparage these parties. Mr. Bess has done exactly what the OB Board hired him to do.

I simply encourage shareholders to resist being defeated by professional opinions and reputations. At the end of the day, trust your own experience and common sense.

In conclusion, I am not against merging OB with a larger institution. There are many more competitors now than OB has ever had to face, and the auto industry is cyclical. There are no guarantees long term.

But I simply don't believe now is the best time to sell. Let's try to get a few more years of profit under our belts, and let the real estate market improve.

This will increase our share price even more, and generate better Tier One Capital ratios to reward the FDIC for its patience (perhaps even get us off their consent order, reduce our premiums and capital requirements), stop spending our money on fancy opinions, and have our leaders spend their time on bonding with the community.

By that time Level One might go public (their website states they plan to go public once they hit $450 million in assets, and currently exceed that), and we can get a better sense of them.

Perhaps we could enjoy the benefits of a true "stock for stock" merger with them, rather than a "gun to the head" fire sale. If you agree with me please vote against this merger.

Lawrence Dick


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