Battle inside Summit State Bank boardroom triggered CEO's resignation

Summit State Bank

Board members

    [li:Allan J. Hemphill, chairman]

    [li:James E. Brush, president and CEO]

    [li:Jeffery B. Allen]

    [li:Josh C. Cox, Jr.]

    [li:Todd R. Fry]

    [li:Ronald A. Metcalfe]

    [li:Richard E. Pope]

    [li:Nicholas J. Rado]

    [li:Marshall T. Reynolds]

    [li:John W. Wright]

    ]

    Principal shareholders

    Shares and value, as of April 2016

      [li:Marshall Reynolds, W. Va., 708,340, $9.9 million]

      [li:Constance Codding, 428,867, $6 million]

      [li:Mark DeMeo, 189,658, $2.7 million]

      [li:Thomas Duryea, previous CEO, 76,206, $1.06 million]

      [li:Dennis Kelley, CFO, 30,210, $423,000]

      [li:James Brush, new CEO, 38,596, $540,000]

      [li:Linda Bertauche, COO, 34,610, $485,000]

      [li:Eugene Traverso, 22,200, $310,000]

      ]

      Sources: 10K, April 29, 2016; proxy statement, May 2015

      Bank history

        [li:1982: Incorporated as Summit Savings]

        [li:1990: Converted to federal savings bank under charter granted by Office of Thrift Supervision]

        [li:1998: Marshall Reynolds (West Virginia) acquired all outstanding shares of Summit Savings, later sold many shares to other investors]

        [li:1999: Renamed Summit State Bank and re-launched as California state-chartered commercial bank]

        [li:2001: Tom Duryea hired as business loan officer]

        [li:2006: IPO raised $21 million, offering price $15 a share, assets $287 million]

        [li:2007: Assets $340 million, equity $48 million, Marshall Reynolds owned 807,020 shares, John Lewis (CEO) owned 92,059 shares, Terrance Davis (pres. + COO) owned 38,676 shares, John DeMeo owned 19,096 shares]

        [li:2008: Two-for-one stock split, Tom Duryea appointed CEO, president, replaced John Lewis]

        [li:2009: James Brush (retired CPA) joins board of directors, $356 million assets]

        [li:2011: Assets $348 million]

        [li:2012: Assets $388 million]

        [li:2013: Assets $445 million]

        [li:2014: Assets $454 million]

        [li:2015: Assets $459 million]

        [li:2016: Assets $513 million. Tom Duryea resigned, replaced by James Brush. Market capitalization $67 million.]

        ]

The pressure leading up to the sudden April 18 resignation of Summit State Bank CEO Tom Duryea had been building for months in a boardroom battle over the financial institution's direction and rate of growth.

Exasperated with lackluster growth at Summit State Bank, West Virginia businessman and Summit board member Marshall Reynolds, who owns nearly 15 percent of the bank's shares, orchestrated the resignation of Duryea and precipitated the exit of a retired Santa Rosa doctor and Summit director who owns $2.7 million worth of bank stock.

Reynolds, the bank's largest shareholder, in a May 2 interview with North Bay Business Journal, pointed to Summit State Bank's anemic growth as impetus for Duryea's departure.

'When you look around at other banks in the market — Santa Rosa,' Reynolds said, 'we were a little laggard in growth. Our bank had not grown as fast as some of the other banks in the market that we competed with,' Reynolds said.

'Growth certainly is one of the things you measure with,' Reynolds said. 'We've got excess capital, with the idea that we were going to acquire something, buy something (another bank). We were not successful. I know that Tom Duryea worked at that and did the best he could. But it didn't materialize. He gave it his best shot. Tom Duryea is a very capable young man,' he said.

'This bank, this investment, has appreciated very, very slowly,' Reynolds continued, 'certainly behind the bar curve of most banks. That's partially my fault. I could have shown some better leadership as the director. Would I sell my stock because Tom Duryea resigned? Of course not. I think Jim (Brush, appointed to replace Duryea) will do a great job as president and CEO.'

Mark DeMeo, a pathologist who practiced for four decades at Santa Rosa Memorial Hospital, resigned his board position after two years of service on April 19, a day after protesting the resignation of former Summit State Bank CEO Duryea, who led the bank for eight years.

DeMeo objected to control of the bank by East Coast directors, especially Reynolds. DeMeo believes that Reynolds seeks to take over Summit State Bank. 'I think he already is controlling it,' DeMeo said, identifying three other directors who fly in for board meetings from the East Coast and vote with Reynolds: Josh Cox, Todd Fry and John Wright.

DeMeo was the only director who voted against accepting Duryea's resignation; 10 other directors, including Reynolds, voted for Duryea's departure and replaced him with James Brush, a board member and CPA who became the bank's new CEO and president.

DeMeo acknowledged 'there were disagreements about the way the bank was running,' he said. 'They thought somebody else could do a good job,' he said, and 'Jim Brush moved in.' Duryea, he said, 'was more independent.'

'I was shocked that more of the local board members wouldn't support him,' DeMeo said of Duryea. 'I'm not privy to all that insider stuff that was going on, especially from the East Coast. This Reynolds guy is a big mover. '

The shakeup has not led DeMeo to sell his shares in the bank, which he began acquiring in 2006 during the public offering. His uncle Charles DeMeo helped start Summit Savings and Loan in 1984, which became Summit Savings then Summit State Bank in 1999.

'This Reynolds guy came in and bought the majority, the controlling number' of shares, DeMeo said. 'I think he has done good things. But when a director doesn't even know where Fourth Street is,' he said, chuckling, 'that's kind of the metaphor I use for not knowing the town. His interest is in making the bank run and making some money. Basically, his interest is not so much in the community. His interest is finding a good CEO that agrees with him.'

East-west conflict

Reynolds, 79, operates out of Huntington, W. Va., a town with 2010 population of about 50,000. He worked there for Chapman Printing in the 1950s as janitor then was promoted to deliveries and sales. In 1964, at age 27, he bought the company from his former boss and sought a $2,800 equipment loan from several banks.

They said no.

Stung by rejection, young Reynolds stormed out of First Huntington National Bank and vowed that he'd 'own this damn bank one day.' He gained controlling interest some 15 years later.

Chapman Printing is now a division of Champion Industries, which has annual revenue of about $65 million; Reynolds and other directors took the company private in January 2016 in a 1-for-200 reverse stock split.

Reynolds also is chairman of the board of Premier Financial Bancorp (NASDAQ: PFBI), a holding company based in Huntington, W. Va., with assets of $1.2 billion, and some 400 employees.

Premier Financial owns Premier Bank, with $849 million in assets in Huntington, and Citizens Deposit Bank, a $390 million bank in Vanceburg, Ky., and serves customers in West Virginia, Virginia, Ohio, Maryland and Kentucky, as well as Washington, D.C. Premier had net income of $12.4 million for all of 2015.

DeMeo disagreed with Reynolds' depiction of Duryea's performance. 'Tom ran a very efficient ship,' DeMeo said. The bank is 'doing extremely well. It's in the upper quartile of local banks. I thought he was doing a great job. I have a feeling there was more of this influence coming from the East Coast on some of the other board members,' he said.

'Mark DeMeo presented this to you as if it's an east-west conflict,' Reynolds said. 'Jeez, if we ever had an east-west conflict, it got settled five years ago, OK? Truth of the matter is, the majority of the stock is owned east of the Mississippi, OK? But most of the directors are west of the Mississippi. It's a community bank. You gotta have community members,' including Chairman Allan Hemphill.

Reynolds said he 'acquired controlling interest' of the bank in 1998, then converted it to a state-chartered commercial bank.

'Isn't it amazing that only one director resigned,' Reynolds said about DeMeo's resignation. 'And isn't it amazing that it was one that had only been there a few months and didn't know what was going on?' he said.

Board member Jim Brush's appointment as CEO is perceived by most board members as long-term. 'I certainly do, absolutely,' Reynolds said. 'I don't think Jim would have taken the job if we had said, gee, we want you to be president for 90 days while we go out and sell this crippled dog. I think Jim would have said, 'Why don't you go to hell?''

Brush, on vacation last week, agreed to talk with the Business Journal after his return to the office. Brush owns 38,596 shares now worth about $540,000; Duryea owns 76,206 shares worth about $1 million, according to public filings.

'This bank right now is better positioned to move forward and grow than it ever has been,' Reynolds said. 'I've held it this long. I'll be damned if I'm gonna sell it now that it's got a chance to go.'

Why oppose resignation

Regarding Duryea's resignation, Reynolds said, 'if a man wants to resign, he wants to resign. What good does it do to vote against him?' Duryea is 'a likable guy, a very nice person. What if everybody had voted not to accept his resignation? That wouldn't have stopped him,' he said.

DeMeo saw Duryea as a mentor who taught him some of the intricacies of banking. He said that other directors began to oppose Duryea months ago. 'I disagreed with it because he was doing so well,' DeMeo said of Duryea's departure.

'I don't think it was mutual,' DeMeo said of Duryea's leaving. 'There was a number of people that didn't agree with what he was doing. I thought he was doing everything right.'

Reynolds 'has a number of his fellow directors' on the board, DeMeo said, directors who do not own significant numbers of shares. 'They were representing him,' DeMeo said. 'There are too many people representing somebody else. I think Tom felt the same way, too. There was too much influence from this particular individual.'

Duryea did not respond to three efforts to reach him. His severance package, including $285,000 plus a bonus in 2017, requires that he not disparage the bank or its officers or directors.

'I like the bank,' said DeMeo of his investment. 'I might be more effective' off the board than as one of its directors. 'Maybe you put a group together. ... I think there will be further conversations.'

Takeover target

Summit State Bank is small, with about half a billion dollars in assets, and a prime takeover target for larger banks, DeMeo said. Russ Colombo, CEO of Bank of Marin, has expressed interest in acquiring Summit State Bank if the price is right. 'It would be a very nice fit,' Colombo said in an interview with the Business Journal in April.

'Like any investor, I'm interested in getting the maximum,' DeMeo said, noting that Summit State Bank has had many interested buyers. 'Listen, every bank is up for sale,' he said, 'especially this bank. We get calls all the time.'

There was discussion of a selling share price, but no agreement on the board, he said. Meanwhile, the dispute over the direction of the bank had been building.

'This had been going on for awhile,' DeMeo said of efforts to remove Duryea — more than half a year.

DeMeo made his objections known early. A few months after he joined the board, DeMeo objected to the cost of flying directors in from the East Coast, especially first-class. He brought forth a proposal to decrease costs, including eliminating first-class tickets for directors and reducing the size of the board.

'I brought those up,' he said. 'That was not popular — a newcomer coming in and saying that. I was ambushed — not ambushed, but it was like, why are you bringing these things up? Traveling directors cost the bank a lot of money. It goes directly down to the bottom line.'

DeMeo finds new CEO Brush 'fairly neutral,' though less independent than Duryea. 'Brush is a very bright guy, knows his stuff,' DeMeo said.

DeMeo praised the strength of loan officers and executives at the bank. 'Tom built that,' DeMeo said, recruiting several loan officers that he calls 'the engines of the bank. If I had my own bank, I'd have him run it. I'd steal every one of those loan officers.'

Reynolds has deep business experience beyond banking. From 1992 until March 1, 2016, he was CEO of Champion Industries, a commercial printer, business-form manufacturer and supplier of office products and furniture with about $65 million in revenue and executive offices in Huntington, W. Va. In January 2016, the board of Champion approved a 1-for-200 reverse stock split of outstanding shares of common stock, seeking to reduce the number of stockholders to fewer than 300 and deregister the company's shares — taking it private. The directors, including Reynolds, owned nearly 57 percent of Champion's Class A shares.

Reynolds is also chairman of the board of Energy Services of America, and chairman of First Guaranty Bancshares, Inc. of Hammond, La. He is a former director of Portec Rail Products of Pittsburgh, Pa., Abigail Adams National Bancorp of Washington, D.C., and First State Financial Corporation of Sarasota, Fla.

Reynolds 'has done good things for the bank,' DeMeo acknowledged. 'He's very knowledgeable about banking. He has done his part in pushing that bank up. As much as I don't agree with some things, he's a smart guy about banking. He knows his stuff. I don't think he would ever steer it in a way that would compromise his investment. If he did, he'd be wacko.'

Summit State Bank

Board members

    [li:Allan J. Hemphill, chairman]

    [li:James E. Brush, president and CEO]

    [li:Jeffery B. Allen]

    [li:Josh C. Cox, Jr.]

    [li:Todd R. Fry]

    [li:Ronald A. Metcalfe]

    [li:Richard E. Pope]

    [li:Nicholas J. Rado]

    [li:Marshall T. Reynolds]

    [li:John W. Wright]

    ]

    Principal shareholders

    Shares and value, as of April 2016

      [li:Marshall Reynolds, W. Va., 708,340, $9.9 million]

      [li:Constance Codding, 428,867, $6 million]

      [li:Mark DeMeo, 189,658, $2.7 million]

      [li:Thomas Duryea, previous CEO, 76,206, $1.06 million]

      [li:Dennis Kelley, CFO, 30,210, $423,000]

      [li:James Brush, new CEO, 38,596, $540,000]

      [li:Linda Bertauche, COO, 34,610, $485,000]

      [li:Eugene Traverso, 22,200, $310,000]

      ]

      Sources: 10K, April 29, 2016; proxy statement, May 2015

      Bank history

        [li:1982: Incorporated as Summit Savings]

        [li:1990: Converted to federal savings bank under charter granted by Office of Thrift Supervision]

        [li:1998: Marshall Reynolds (West Virginia) acquired all outstanding shares of Summit Savings, later sold many shares to other investors]

        [li:1999: Renamed Summit State Bank and re-launched as California state-chartered commercial bank]

        [li:2001: Tom Duryea hired as business loan officer]

        [li:2006: IPO raised $21 million, offering price $15 a share, assets $287 million]

        [li:2007: Assets $340 million, equity $48 million, Marshall Reynolds owned 807,020 shares, John Lewis (CEO) owned 92,059 shares, Terrance Davis (pres. + COO) owned 38,676 shares, John DeMeo owned 19,096 shares]

        [li:2008: Two-for-one stock split, Tom Duryea appointed CEO, president, replaced John Lewis]

        [li:2009: James Brush (retired CPA) joins board of directors, $356 million assets]

        [li:2011: Assets $348 million]

        [li:2012: Assets $388 million]

        [li:2013: Assets $445 million]

        [li:2014: Assets $454 million]

        [li:2015: Assets $459 million]

        [li:2016: Assets $513 million. Tom Duryea resigned, replaced by James Brush. Market capitalization $67 million.]

        ]

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