September 12, 2012 - Thursday, Sept. 13 marked the beginning of the end of an era as it was announced that one of the oldest businesses in Oxford is in the process of being sold.
Shortly after 4 p.m., it was revealed that the 128-year-old Oxford Bank has entered into a "definitive agreement" under which it will be acquired by the Farmington Hills-based Level One Bank for a $3.47 million.
"We're purchasing the bank and then the operations (will) get merged together," said Patrick Fehring, president and CEO of Level One Bancorp., Inc. "They will be combined into a common system. They will operate under one system and one name."
That "one name" will be Level One Bank.
"We've had Austin Associates out of Toledo, Ohio thoroughly go through the deal and we've obtained a fairness opinion from them and they believe that it is a fair deal based on the bank's circumstances and the market for the price of a small community bank right now," said James Bess, president and CEO of Oxford Bank.
For the last five or so years, Oxford Bank's been struggling, but has shown improvement. However, it's simply not enough improvement to continue on its own.
"This bank for a while was in harm's way," Bess said. "This bank came very, very close to failing, frankly. We have recovered, but we're under this mandate (from federal and state regulators) to either recapitalize or sell it, so we've had to go outside to try to find someone to do this."
Fehring said it's anticipated the acquisition will be finalized by the first quarter of 2013
"We'll be communicating with everyone along the way as things progress," he said. "This is the first step, (having) a definitive agreement."
Fehring is excited about the deal.
"It's a good match for both of us," he said. "(We're) a local community bank very similar to Oxford . . . Like Oxford, we're a community-based bank based right here in Oakland County."
Fehring was impressed by the fact that Oxford Bank has a "long heritage in the community." It's operated continuously under local ownership and management since it first opened in 1884 and has the distinction of being the oldest commercial bank in Oakland County.
"We certainly respect that and admire their contributions," he said.
Bess was complimentary of Level One.
"I think they're good people," he said. "All my dealings with them have been very positive so far. I think they're a good bank. They're strong. They have a very strong board who have the financial means to provide the capital that they need to make acquisitions and grow."
"I think their management team has a high level of expertise and I think that speaks well for the prospects of the franchise going down the road," Bess added. "We just feel very fortunate to be able to enter into a transaction with these folks . . . We think that it is good for Oxford and we think it's good for Oxford shareholders, customers and employees."
Founded in 2007, Level One Bank is a commercial and consumer bank with assets of approximately $500 million. It currently operates seven full-service banking centers throughout southern Oakland County with one in Macomb County.
"I was one of the cofounders," said Fehring, who lives in Northville. "I think people should feel very comfortable with the fact that we're a local institution (that's) highly rated."
"Bauer (Financial), which is one of the leading (rating) agencies (of financial institutions), rates us five stars, which is the highest, safest rating that Bauer offers," he continued. "We're awarded that because of our high capital level and because of the quality of our credit portfolios (along with) some other factors. It doesn't get any better than a five-star."
Both financial institutions' boards of directors have unanimously approved the acquisition, which will entail the purchase of all Oxford stock by Level One.
Oxford stockholders will be offered $3 per share. Oxford stock was trading at $2.90 per share on Thursday, Sept. 13.
"While $3 is not probably what everybody wished it would be, I think it's a fair price," Bess said. "At one time, the stock in this bank was trading for $50 to $60 a share, but it almost traded for zero (in recent years)."
"It does give the shareholders $3 that they may not have ever seen if this bank had slipped and gone the other way," Bess noted.
A mailing to the shareholders explaining the situation will be sent out on Friday, Sept. 14.
"There's 1,156,690 shares outstanding," Bess noted.
Although the two banks have a "definitive agreement" in place, the sale is still subject to approval by the shareholders of Oxford Bank, the Federal Reserve Bank of Chicago, the Michigan Office of Finance and Insurance Regulation, and the Federal Deposit Insurance Corporation (FDIC).
"The transaction is also subject to a determination by regulators that after completion of the merger, Level One Bank will comply with applicable capital requirements," according to a jointly-issued press release.
"I think all three regulatory agencies will look very favorably on the deal," Bess said. "I think they think it's good for Level One. I think they think it's good for Oxford."
As for Oxford shareholders, Bess said, "We're hopeful that we can explain the story the past and the present sufficiently, so the shareholders will understand."
"We take our shareholders very seriously because obviously, that's who we work for," he said. "We try to serve them as best we can."
Although a firm date and time has not yet been set for a special shareholders meeting to vote on this sale, Bess expects it to happen "sometime in November." Oxford has 90 days to hold this meeting as of Sept. 13.
If the shareholders reject the sale to Level One, Bess said, "It would not surprise me, if (the FDIC) put a date on" when the bank must be recapitalized. And if that deadline wasn't met, "they can close you," he said.
"We have not been threatened and the bank is not in harm's way in any way, shape or form right now, but I'm just telling you that behind the scenes we have to, as management, deal with that prospect because our marching orders from our regulator right now is to recapitalize it or sell it," Bess explained.
Oxford Bank had been making improvements over the last few years. It's been profitable since the last quarter of 2010 and had been slowly rebuilding capital while decreasing the number of problem assets. At June 30, non-performing assets made up 5.46 percent of the bank's total assets.
"The bank has done well," Bess said. "At the end of September, we will have had eight consecutive quarters of profitability here, but we're still at half of the capital. Our Tier 1 capital ratio at the end of September is going to be in the vicinity of 4.6 to 4.65 (percent). Of course, the regulatory mandate is to have a minimum of 8 percent."
Although the capital ratio is a little more than half of where it's required to be, it's still a big improvement for Oxford Bank.
"We got down as low as 2.44 percent in the late summer of 2010," Bess said.
Bess noted the first thing the bank tried to do around the time he took the helm in June 2009 was to try to generate additional capital from the existing shareholder base.
"We weren't successful," he said. "We couldn't get anybody to do that. The board (of directors) has not come forth with raising any capital."
Although it hasn't happened, Bess said it's been looming in the background that because of Oxford Bank's capital deficiency, the FDIC could decide to step in and force the issue.
"You have to keep in mind that (this) $270-million bank has got $254 million of FDIC-insured deposits," he said. "The FDIC, particularly if you're capital deficient, they play a very, very strong (role)."
Bess explained the FDIC has the power to tell the bank's board of directors "you've got 90 days to raise X number of dollars in capital to reach the minimum threshold."
"They have not done that with us," he stressed. "They know that we've worked very hard and very diligently to try to either recapitalize or find an outside partner. So, they haven't put any time constraints on us.
"But what they could do, to management as well as the shareholder base, is say, 'All right, you've got 60 or 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."
Not only does Oxford Bank lack enough capital to meet regulatory requirements, it doesn't have enough to properly maintain its aging facilities in the future.
"One of the struggles with Oxford Bank is while we've been able to turn this thing around to a certain extent and make it profitable, we still have a bunch of old buildings and we have old infrastructure that was never invested in in the past," Bess said. "Eventually, on our own, we'd have to come to grips with all of that and we don't have the capital to get our arms around those things."
Once the acquisition and merger are complete, Level One will be one of the largest locally-owned, independent community banks in the county.
Fehring indicated purchasing Oxford Bank is "part of a more broad plan" by Level One.
"When we started the bank, we acknowledged that we would grow, both organically and that we would look at acquisition opportunities as they came before us," he explained. "This is the third acquisition (for) Level One. The two prior were transactions that involved failed banks from the FDIC. We had acquired Michigan Heritage Bank originally (in 2009), followed by Paramount Bank (in 2010). This would be the third bank since 2007."
When asked how long this deal has been in the works, Fehring indicated it's been a "60 to 70-day process."
"We've had a chance to meet some of the people there and spend some time (getting to know Oxford Bank)," he said. "We've had a lot of dialogue over the last two months and came to terms with the definitive agreement here this week."
"(Oxford Bank) CEO, Jim Bess, and I had lunch some time over the summer (as a) first contact," Fehring noted. "Shortly thereafter, (we) entered into some dialogue and met a few times more. That led to some due diligence and ultimately, resulted in the transaction that we announced today."
Ultimately, Fehring believes this purchase is "a good move for Oxford."
"We're bringing more capital to the local market there, more banking capital and resources," he explained. "We'll have a greater flow of credit available for home mortgages and small business loans, (plus) a wider array of products in the local community bank."
As for the benefit to Level One, Fehring believes the merger will give "customers of both banks more geographic locations to (do business)."
"We'll now have 15 offices," he said. "There will be more locations to serve clients in the area and a broader array of products as a result. I think after the change everyone will be excited."
Right now, Oxford Bank has eight full-service offices in Clarkston, Davison, Dryden, Goodrich, Lake Orion, Oakland Township, Ortonville and the main branch in downtown Oxford. It also has a consumer lending center in Oxford and a commercial banking office in Lake Orion.
"I haven't visited every (office). I've visited most of them," said Fehring, who noted he's spent some time in the main office in downtown Oxford. "It's obviously very well positioned right in the center of town there."
Level One has two branches in Farmington Hills, plus locations in Clinton and Bloomfield townships, Northville, Birmingham and Ferndale.
When asked if Level One plans to keep all of Oxford Bank's current locations or close any of them, Fehring replied, "At this time, we don't have any firms plans on all of that. Certainly, Oxford has a great position throughout the metropolitan area there. So, there's no plans at the present to do anything differently."
When asked if Oxford Bank's staff will be reduced, increased or remain status quo, Fehring said, "We really won't know until the acquisition is complete . . . We'll get a chance to know everyone at the bank between now and the first quarter of next year."
For now, Oxford Bank customers will "continue to see the same faces in the offices."
"We'll continue to operate as two separate institutions pending final approval (of the sale)," he explained. "There will be some assessments of what we need moving forward after the first of the year."
"I would expect some new job opportunities because there will be things that we're doing more of," Fehring noted. "Some of the opportunities might be in the areas of residential mortgage lending or business banking.
The good news is Fehring foresees the end of the cease-and-desist order under which Oxford Bank's been operating since May 2008 after the severe downturn in the real estate market left it with a high number of non-performing or under-performing loans.
That order was issued by federal and state regulators and formally consented to by Oxford Bank. It required the bank to take numerous actions designed to correct the management and lending practices that contributed to the institution's financial problems. 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.
"As of today, (the order's) still in place," Fehring said. "We anticipate that (consent) agreement will be lifted with the finalization of our acquisition . . . With that being released, we'll be able to do more things."
It's expected the order will be lifted because of the infusion of capital Level One's bringing to the table.
Upon the closing of this deal, the two banks will have combined assets of approximately $750 million, including 15 bank branches. Right now, Oxford Bank has about $270 million in assets, according to Bess.
Fehring explained that Level One is not operating under cease-and-desist order (or consent agreement) with regulators nor has it ever been required to in its short history.
"We were fortunate although it may not have felt like it at the time (that) when we opened, the recession had already started," he said. "We did not have a legacy of any problem loans. We weren't engaged in some of the banking activity that got banks in trouble. Sometimes it's better to be lucky and we missed the storm."
In the end, Bess indicated that Oxford Bank can longer be competitive on its own due to forces beyond its control.
"We're too small," he said. "A $270-million bank right now has a tough time competing, particularly with the regulatory burden that's coming out of Washington. The compliance and other regulatory issues that keep building make it increasingly difficult and expensive for a small bank to cope with all this regulation."
Bess said merging with Level One will help make Oxford Bank more competitive.
"It gives us additional mass," he said. "If you put these two banks together we're about $750 million (in assets) . . . Most of us think that to run a good, successful community bank, you probably need to be $1 billion in total assets."
Overall, Fehring sees "a lot of opportunity" in Oxford and northern Oakland County.
"There seems to be quite a bit of growth in that corridor," he said. "It's coming in that direction, so we think it's a natural extension for a bank based in Oakland County."
For a bank that's concentrated primarily in the southern, urban portion of the county, Oxford Bank's offices, which are situated in a more rural area, definitely represent a change of venue. But Fehring doesn't believe that will be a problem.
"It is different. We acknowledge that," he said. "There's a little bit more of a rural characteristic to some of the branch locations there. But banking is a pretty basic business in terms of taking deposits and making loans in the community, so I think the principles are very similar whether it's a more urban market or a rural market."
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.