May 22, 2013 - After months of waiting and wondering, Oxford Bank will continue to be Oxford Bank for the foreseeable future.
Last week, the 129-year-old financial institution terminated the agreement through which the Farmington Hills-based Level One Bank was going to purchase it and merge the two banks' operations under the Level One name.
"Right now, we continue to be a stand-alone, independent community bank," said James Bess, president and chief executive officer of Oxford Bank. "The ownership is the same. The name's the same."
Level One was in the process of buying Oxford Bank for $3.47 million, but the sale could not be finalized until approval had been given by federal and state regulators.
It's been a waiting game ever since about 51 percent of Oxford Bank's stockholders voted Nov. 13, 2012 to sell 1,156,690 outstanding shares for $3 each.
In a nutshell, the Oxford Bank Board of Directors decided on May 14 to terminate the merger with Level One because it could no longer continue to function in a state of limbo and the local institution's financial condition has been steadily improving.
"We just figured that we had invested enough time in that project," Bess said. "It was time to move on. That's what we've done."
On May 16, just two days after the termination was announced, Oxford Bank's stock value experienced a 52-week high of $5.25 per share. It's 52-week low was in August 2012 when it dipped to $1.51 per share.
Level One President/CEO Patrick Fehring did not return a phone call seeking comment.
Bess explained that in the beginning, Level One had hoped to close the deal no later than the end of the first quarter of 2013.
"There was hope originally that it might close as early as January," he noted.
The merger agreement between Oxford Bank and Level One had an original expiration date of March 15. But there was an automatic 60-day extension if the closing of the deal was delayed because of the regulatory approval process. That pushed the expiration date to May 13.
Once that date came and went, the Oxford Bank board "had the authority to terminate" the agreement and it was "decided we couldn't be bound by those restrictions any longer."
"(The pending sale/merger) tied our hands to do the normal things we needed to do," Bess said.
For instance, Oxford Bank had nine resignations due to the pending sale/merger. For the most part, they were mid-level management positions. The bank lost key personnel in the areas of commercial lending, marketing and human resources.
"We didn't try to hire replacements," Bess said. "We just tried to get by with what we had. How are you going to hire people if you can't tell them what the future is tomorrow? We didn't know for sure."
Bess indicated the most frustrating part of the whole experience was not being able to get a definitive answer from the government regulators because they will not disclose any information about where they are in the process to either of the banks involved or to the public.
"They just won't tell you," he said. "You would think it's a top secret matter of national security. They will not tell you what the specific reason for the delay is."
"We never knew for sure what was causing the delay or when it was going to be over with," Bess continued. "It could have been up or down tomorrow or it could have been an up or down six months from now. You just didn't know."
"We just couldn't keep going on and on and on like that."
While this constant uncertainty weighed heavily on Oxford Bank's board and management, they are now being encouraged by the institution's consistently improving financial condition.
"We've made a lot of progress since late summer/early fall (last year) when we started talking with Level One," Bess said. "We've got a couple of million dollars more (in) capital than what we had back then just through earnings."
Bess noted how May will be the bank's 31st consecutive month of profitability.
"We're prosperous. We're doing well now," he said. "Things are getting closer and closer to normalcy as we go along. We're really encouraged by that."
At it's "low point" at the end of the third quarter of 2010, the bank's Tier 1 capital ratio was 2.44 percent (or $7.1 million).
As of March 31 this year, it was 5.43 percent (or $14.3 million).
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. The 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 one with less than 10 percent. A higher Tier 1 ratio implies that the bank is being run very conservatively.
The cease-and-desist regulatory order that the bank's been operating under since May 2008 requires a minimum Tier 1 capital ratio of 8 percent.
Issued by federal and state regulators and formally consented to by Oxford Bank, the order required the institution to take numerous actions designed to correct the management and lending practices that contributed to its financial problems.
The severe downturn in the real estate market left Oxford Bank with a high number of non-performing or under-performing loans. Between June and October 2007, the bank's percentage of delinquent mortgages had doubled from about 3.5 to 7 percent. Normally, it was about 1 percent.
So, does the termination of the agreement with Level One mean Oxford Bank is finished with the idea of selling itself or merging with another financial institution?
"We can't say that," Bess said. "We can't say that because we are out of compliance (with the regulatory order). Until we hit 8 percent, the FDIC (Federal Deposit Insurance Corporation) considers us to be out of compliance. We are supposed to be using whatever means we can to obtain that capital."
So, the option of selling or merging must remain on the table because of the regulators.
"If we can't (recapitalize the bank to that 8 percent level) from within ourselves, then we're supposed to be going out to other bank holding companies, investment bankers or whatever means that we have at our disposal to try to raise that money as soon as possible," he said. "They won't let you off the hook until you hit that number."
"Everything's available for a price," Bess noted. "If somebody came in with some pie-in-the-sky price, then we have a fiduciary responsibility to our shareholders to at least give them the opportunity to say 'yes' or 'no' to it.
"In the end, the shareholders are going to be the ones that say whether we get sold or whether we merge. If there's a change in control, we always need shareholder approval."
That being said, Bess made it clear that the bank's intention is to try to remain a local and independent institution, and not change ownership or control.
"That's our preference," he said. "Hopefully, we can (recapitalize the bank) without a change in control that would cause the bank to be sold, so to speak."
"We're actively looking for capital. We're not actively looking to sell the bank."
Bess explained that the bank needs another $5 million to $6 million to reach that 8 percent Tier 1 capital ratio.
"The goal's a lot more reachable now (than when the bank was at 2.44 percent in 2010)," he said. "It's one thing to raise $30 million and another thing to raise $5 million. We're hopeful."
Bess indicated the bank makes about $1.8 to $2 million a year and it takes $2.5 million to gain a percentage point in the Tier 1 capital ratio.
"If we didn't bring any (investment) capital in and assuming that we could maintain our earnings, you're probably talking two or three years (to recapitalize the bank)," he said.
But it could be quicker than that.
Oxford Bank is "in the process of formulating a capital restoration plan right now that if we can execute it the way that we are hopeful of executing it, we could actually hit 8 percent by the end of this year," according to Bess.
"But there's some 'ifs' in there – if we can do this and if we can do that," he said.
"If we can give (the regulators) a capital restoration plan that allows us to hit that 8 percent by the end of this year, that will probably be acceptable to them," Bess continued. "But I can't guarantee them that I can execute it.
"I may do part of it. I may do all of it. I may do none of it. So, at that point in time, they're going to continue to hold my feet to the fire or hold the board's feet to the fire to raise capital."
Continued earnings aren't the only way the bank is seeking to recapitalize itself.
"We're even hopeful that we can generate some new interest within our existing shareholder base to maybe invest in the bank a little bit further," Bess said.
So, how did bank employees react to news of the merger's termination?
"The employees love it – I can tell you that," Bess said.
"When somebody gets bought, there's always a certain amount of consolidation," he continued. "It makes people fearful because they're not sure what the future holds for them. It's a big load off the (minds of the) employees."
He added that it's also probably a relief to many of the bank's shareholders.
"You know we had a split vote (in November 2012), so some people wanted to sell, some people didn't want to sell," he said. "It depends on who you're talking to."
What's next for Oxford Bank?
"For most of the last four years, we've pretty much been trying to take care of our problems," Bess said. "Most of our problems are behind us and now, we're starting to talk about marketing and advertising and growing the bank – doing the things that you would normally do and what Oxford Bank was used to doing in the past."
Bess indicated the bank is looking to fill about five or six of those nine positions that were vacated because of the pending sale/merger. He's hoping to have that done within about 30 days.
"We need to fill those positions as soon as we can so we can get our momentum reestablished as quick as we can because we were kind of sitting on our hands for seven months waiting for this thing to happen," he said. "You lose momentum when you're not moving forward. You end up going backwards a little bit."
What does the future hold for James Bess who was hired in 2009 specifically to turn the bank around?
"I was supposed to be here two years," he said. "It's been four years, but I want to see this through to a conclusion. I want to get them off the (regulatory) order . . . and get the bank in a condition so we can get a long-term guy in here.
"I'm not going anywhere right away."
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.