A sharp increase in mortgage delinquencies precipitated by the state’s poor economy recently required Oxford Bank to enter into a formal consent agreement with its federal and state regulators.
‘We want our communities to know the bank is fine,? said Oxford Bank Chairman, President and CEO Jeff Davidson. ‘Yes, this is a difficult time, but the board and management are on top of it. When we come out on the other end of this we’re going to be stronger.?
Davidson, who met with the Oxford Leader Saturday morning, wished to assure everyone, from the bank’s customers to its shareholders, that this agreement does not mean the 124-year-old community financial institution has been taken over by regulators.
‘You never want to be under an agreement, but it doesn’t mean the (Federal Deposit Insurance Corporation) is calling the shots,? he said. ‘They’ve made recommendations. It’s up to management and this board of this bank to carry them out. They’ll watch over our shoulder ? make sure that we do that ? and that’s okay.?
Oxford Bank is federally regulated by the FDIC and on the state level, the institution’s overseen by the Michigan Office of Financial and Insurance Regulation.
Although it’s technically called a ‘cease-and-desist order,? Davidson explained the title is designed to be an ‘attention getter? and basically the consent agreement means ‘the bank will cease and desist the practices that have caused it to have these problems.?
‘We haven’t shut down lending,? he noted. ‘We’re just adjusting to the times.?
The consent agreement went into effect May 25 following seven months of negotiations between bank representatives and government regulators.
‘The regulators, contrary to popular belief, don’t want you to fail,? Davidson said. ‘They are here to help.?
However, Davidson noted before the FDIC came in for its routine audit in September 2007, he was already well aware of the rise in delinquent mortgages.
Between June and October 2007, the bank’s percentage of delinquent mortgages doubled from about 3? percent to 7 percent.
‘For us, that’s high,? Davidson said. ‘Normally, it was about 1 percent.?
Davidson brought in an outside loan review company to examine the situation and as a result, the bank was in the process of tightening and strengthening its policies when the regulators showed up.
‘Management has been taking action since prior to ever meeting with the FDIC,? he said. ‘We wanted our shareholders and our communities to know that we’re ahead of this game.?
Under the terms of the FDIC order, Oxford Bank agreed to take actions such as reviewing its management and committee structures, rewriting some of its policies (particularly on the loan side) to strengthen them, and setting new limits on how much risk the bank is willing to take in areas like construction lending.
‘With the single exception of getting rid of the real estate that we own (from foreclosures), management and the board have already addressed 99 percent of the issues in this agreement,? Davidson said.
The bank currently owns about 50 properties, only two or three of which are commercial, as a result of foreclosures.
Most are the result of either people losing their jobs in the auto industry and related fields or local builders who constructed a few spec or model homes and simply walked away from them when the real estate market crashed, according to Davidson.
‘We live and die with the community,? he said. ‘As it suffers, so does the bank. We understand that’s who we are.?
Unfortunately, these foreclosure properties pose a financial drain because not only are they no longer earning any interest for the bank, they’re actually costing the financial institution money.
The bank has to pay maintenance costs such lawn mowing and snow removal, utility costs, property taxes (including the school non-homestead rate), and fees for attorneys and real estate brokers, who are helping the bank sell these properties.
‘We do not want to be Realtors,? Davidson said.
Selling these properties is more difficult for a community bank than a large corporate bank.
Davidson explained the latter has out-of-state income sources that enable them to sell their properties for 50-60 cents on the dollar.
‘We’re still trying to get 65 or 70 (cents) because we don’t have out-of-state income to offset the impact on our liquidity,? he said.
Anyone interested in viewing the bank’s list of available properties can call (248) 628-2533. Davidson noted that first-time home-buyers can ‘get great deals right now.?
The bank is in the process of bundling groups of properties to market them to investors.
‘At some point in time this is going to become valuable and an opportunity for many investors,? Davidson said. ‘It’s really totally dependent on revitalizing the market.?
While most experts say the market will pick up anywhere between 2009 and 2011, Davidson said, ‘I tend to be more on the ?10 to ?11 bandwagon than I am on ?09.?
Davidson said the bank was not required to publicly disclose that it entered into this agreement with the FDIC, but he felt it was the right thing to do.
‘I don’t like surprises and I don’t think the shareholders do either,? he said. ‘I don’t think the community needs to be surprised and find this out from the Detroit (news)papers.?
Letters explaining the situation to the bank’s shareholders were mailed out Friday. A press release was issued Monday afternoon.
Overall, Davidson said the bank’s financial situation is pretty healthy.
‘We’ve got a lot of cash,? he said. ‘We have a lot of liquidity. If we need the cash, we could get it.?
‘Our balance sheet today is stronger than ever,? Davidson explained. ‘If all things were equal, we would be making more money today than we were at the same size operation eight years ago. Unfortunately, all that money we’re making is being poured in supporting the houses (the bank’s foreclosed on).?
Last year, the bank lost $5 million. This year the institution is expecting to lose more than $2 million, according to Davidson.
As a result, all employees? wages, including Davidson’s, will remain frozen as will the fees paid to the board of directors. Bank officers haven’t received bonuses in two years.
‘It’s not just little guys,? he said. ‘Everybody’s involved.?
Cash dividends for shareholders will be suspended for the second consecutive year.
Davidson said the ‘prudent? thing to do is put that capital into the bank’s ‘loan loss reserve? to protect it against losses on foreclosures.
‘We’ll get back to paying dividends as quickly as we can get back to making money,? he said.
Davidson wished to remind shareholders that although the bank’s stock price is ‘significantly down,? it has ‘held much better? on a percentage basis than a majority of community banks in Michigan, particularly the southeast region.
He noted that unlike a large corporations, which trade millions of shares on a daily basis, Oxford Bank’s stock trades ‘very rarely.?
So, if ‘somebody decided they wanted out? and traded 200 shares, ‘it can impact our price.?
News regarding other banks and the banking industry in general also affect Oxford Bank’s stock price.
‘Our stock is impacted by more than just our own performance,? Davidson said.
Eventually, the economy will rebound, the foreclosed properties will be sold and Oxford Bank will be prosperous once again, but there there’s still much work to be done.
‘It will end, but it’s going to be a chore,? Davidson said. ‘We appreciate the support from our shareholders and our customers.?