October 31, 2012 - It's official – at 9 a.m. on Tuesday, Nov. 13, the shareholders of Oxford Bank will gather at American Legion Post 108 on E. Drahner Rd. to vote on whether or not they wish to accept Level One Bank's offer to buy them out at $3 per share.
Jay Smith, certified financial planner, is advising Oxford Bank stockholders to sell to Level One Bank at the Nov.. 13 shareholders meeting. (click for larger version)
While it doesn't sound like a lot of money – especially for a bank that was trading at around $50 per share back in 2002 – Financial Advisor Jay Smith, a certified financial planner and owner of the Oxford branch of Raymond James Financial, believes it's a good deal in light of the significant difficulties Oxford Bank has faced over the last few years and what could happen to the 128-year-old financial institution if this sale to Level One does not go through.
"The offer that's on the table is reasonable based on the condition of the bank," said Smith, who's an Oxford Bank shareholder and served on the institution's board of directors from 1999 to 2008. "Three dollars is better than the alternative, which might be zero."
Smith was referring to the possibility that federal regulators could decide to step in at some point and close the troubled bank if the mandate it's been under to either recapitalize the capital-deficient financial institution or sell it is not met.
When the pending sale was first announced, Oxford Bank President and CEO James Bess told the Leader, "The FDIC (Federal Deposit Insurance Corporation), particularly if you're capital deficient, they play a very, very strong (role).
"They know that we've worked very hard and diligently to try to either recapitalize or find an outside partner," Bess said at the time. "So, they haven't put any time constraints on us. But what they could do, to management as well as the sharehold base, is say, 'All right, you've got 60 to 90 days to cure this capital deficiency or we're coming down on you.' Now, they haven't done that . . . But it's a fact of life with this thing right now. You can call that a gun to your head or not, but it probably really is."
"Looking at the numbers, I can see how that could happen," Smith said. And in the case of a bank closure, the stock "would be worthless – just like K-mart was when it went into bankruptcy."
"The good news is the feds did not come in and take over the bank as was rumored over the last few years," Smith noted, "It didn't happen, so the good news is (the shareholders are) getting out with an equity position that's going to be turned into cash."
Back in September, it was announced that Oxford Bank had entered into a definitive agreement under which it would be acquired for $3.47 million by the Farmington Hills-based Level One Bank.
Both Oxford Bank and Level One's boards of directors have unanimously approved the acquisition, which will entail the purchase of all Oxford stock by Level One.
Oxford Bank has 1,156,690 shares outstanding. Multiply that by Level One's $3-per-share offer and there's the $3.47 million sale price.
Before the acquisition can be finalized, it must be voted on by Oxford shareholders and approved by three regulatory bodies – the Federal Reserve Bank of Chicago, the Michigan Office of Finance and Insurance Regulation and the FDIC.
If all goes well, it's anticipated the acquisition will be finalized in the first quarter of 2013. At that point, all eight Oxford Bank branches would change their name to Level One.
Oxford Bank stock was delisted – which means its shares are no longer traded on the stock exchange – due to the offer from Level One. Its last sale price was $1.70 and its last buy price was around $2.80.
"When I say $3 (per share) seems like a reasonable sell price it's because that's higher than what the last sell price was," Smith said.
Due to the local rumor mill, some folks might be operating under the false assumption that because Oxford Bank's combined assets – such as its branch offices and the land they sit on – are likely worth much more than $3.47 million, that if the bank were to close, the proceeds from the sale of these would yield more for shareholders than the $3-per-share offer from Level One.
The problem is, if that scenario occurred, the shareholders wouldn't see a dime of that money, according to Smith.
"It's true that if you did sell them at the top of the market, you could probably get more than $3 million," he said. "But what these people don't realize is (the bank's) got a whole bunch of liabilities that you have to subtract off of any price."
"It's just like your home. If you have a $300,000 mortgage on a $200,000 lot, it's not worth $200,000 because you've got this $300,000 liability hanging out there," Smith added.
Even if there's any money left over from a sale of bank assets, it still wouldn't go to the shareholders.
"Absolutely not," Smith said. "It would go to the FDIC to cover the expense of taking (the bank) down. They keep it. It's theirs."
Smith's been advising his clients who own stock in Oxford Bank to accept the offer.
When asked how his clients have reacted to the $3-per-share offer, Smith replied, "Surprisingly, most people have reacted quite reasonably. Nobody is really angry or upset because they know how troubled that whole part of the economy is."
Over the last five years, Oxford Bank's been struggling, but has shown improvement.
For example, it's had eight consecutive quarters of profitability.
However, it's simply not enough improvement to continue on its own as it's still under a mandate from federal and state regulators to either recapitalize or sell the bank.
At of the end of the third quarter (Sept. 30), Oxford Bank's Tier 1 capital ratio was 4.27 percent. The regulatory order the bank is operating under requires a minimum of 8 percent.
The Tier 1 capital ratio is the ratio of a bank's core equity capital to its total risk-weighted assets such as mortgages and other loans. This ratio is considered to be a more reliable measure of financial strength than other numbers that can be calculated to evaluate a bank.
In general, the higher the ratio the better the bank. For example, a bank having a Tier 1 ratio of 20 percent is better than the one with less than 10 percent. Higher Tier 1 ratio implies that the bank is being run very conservatively.
Smith believes selling is the only viable option for Oxford Bank's future. He feels it would be too difficult for the bank to continue on its own given its primary source of revenue is the interest payments from mortgages and loans.
"All community banks in Michigan have had a very rough go since 2007," Smith explained. "Those that survived may have a more diverse business base than what Oxford does. For example, Lapeer County Bank has a trust department, so it's a small bank, but yet they have another source of revenue.
"(Lapeer has) a money management division inside the bank that generates revenue by managing people's money in their trust account. They're able to weather the storm because they have something going (for them) other than mortgages and loans."
In contrast, Oxford Bank is basically a mortgage lender, so that's where the majority of the financial institution's income is generated.
"As with most community banks, the bread and butter of (Oxford Bank) was the loans – that was the heart of the bank," Smith said. "And most of that was private real estate residences. When that market collapsed – meaning the value of the property and the underlying mortgage – that made the value of the bank depreciate.
"When you borrow money from a bank, that's an asset to the bank and when you give money to the bank for a (Certificate of Deposit) or a savings account, that's a liability. So, the bank's assets, which were all of the real estate mortgages, rapidly depreciated in value. And every community bank in the Midwest had the same problem."
"When you're a mortgage lender and mortgages on homes have to be adjusted downward because of the (declining) value of the properties, that makes your assets worth less and you're out of compliance with all of your ratios," Smith continued. "It's a difficult scenario to overcome until real estate values appreciate, which may take many, many years – maybe even as many as 15 years."
If the sale to Level One is not approved and Oxford Bank continues to operate on its own and is not closed by federal regulators at some point, could the institution manage to survive as it has since 1884?
"Without a rapid increase in property values, I think (Oxford Bank's) going to continue to plod along. It may survive, but who knows? I could only guess," Smith said. "It's a very, very difficult scenario when the assets of the bank – the mortgages we all had there – are down to historical lows. At best, it's an extremely difficult road ahead."
In the end, Smith believes the sale to Level One is the absolute right move. "There's no risk," he said. "The safety and soundness of Level One is superior to Oxford. Their ratings are substantially higher . . . This is not some hedge fund coming in; these are bankers."
Level One has approximately $500 million in assets compared to Oxford's approximately $270 million. Bauer Financial, one of the leading rating agencies for financial institutions, gives Level One five stars as opposed to Oxford Bank's one star.
On a personal note, Smith said, "I wish they would have kept the (Oxford Bank) name, but obviously they're not going to do that."
CJ Carnacchio is editor for The Oxford Leader. He lives in the Village of Oxford with his wife Connie and daughter Larissa. When he's not busy working on the newspaper, he enjoys cigars/pipes, Martinis/Scotch, hunting and fishing.