Michigan Bank Takes Second Stab at Capital Plan

A struggling company in central Michigan is hoping a $17 million lifeline will help it evade potentially crippling regulatory sanctions.

FNBH Bancorp (FNHM) in Howell, parent of the $299.1 million-asset First National Bank, needs the funds to comply with a four-year-old consent order with the Office of the Comptroller of the Currency. The OCC's order requires the bank to maintain a total risk-based capital ratio of 11%. As of June 30, First National had a 6.5% ratio.

FNBH gave investors a frank assessment in its quarterly report filed with regulators last week. "Further regulatory enforcement action may occur if the capital raise is not completed or the corporation is unable to effect another recapitalization within the relatively near future," the filing said.

Ron Long, FNBH's president and chief executive, did not return a call seeking comment. An OCC spokesman declined to comment.

The company lost more than $40 million between 2007 and 2011 before eking out a $329,000 profit last year, according to regulatory filings. FNBH's assets have shrunk nearly 30% since the end of 2005.

Still, the company appeared to have solved its capital problems in December, when it said that an offering to sell nearly $27 million in stock and debt had attracted nearly $23 million in subscriptions, or enough to bring its capital ratios into compliance with the consent order. In June, however, FNBH announced that its regulators had rejected the debt-and-equity transaction.

Regulators likely objected to the sizable amount of debt that was included in FNBH's initial refinancing plan, says John Wagster, a finance professor at Wayne State University in Detroit. About two-thirds of the $22.9 million that FNBH had hoped to raise would have come from selling subordinated debt.

"Regulators really like equity," Wagster says. "That is the big focus."

Indeed, regulators view common equity as "the single best form of equity capital," says Kevin Jacques, a finance professor at Baldwin Wallace University in Berea, Ohio.

"I'm not in the least surprised they nixed [FNBH's initial recapitalization plan] and said that is not going to work," Jacques, a former senior economist at the OCC and Treasury Department, says. "Debt is viewed as lacking the ability to absorb unexpected losses that common-stock equity possesses."

Much of the cash FNBH is relying on now would come from its vice chairman — Stanley Dickson Jr., an accountant and lawyer who owns a chain of Detroit-area restaurants. Dickson has agreed to invest $7.5 million, which would bump his ownership stake above 40%. As part of the purchase agreement, FNBH would permit Dickson to appoint two additional directors to its eight-member board.

Dickson, who filed a change-in-control application with the Federal Reserve Board that remains in a comment period until Aug. 28, has been an FNBH director since October 2009. A few months before joining the board, Dickson bought more than 360,000 shares of the FNBH's stock, or an initial 11.4% stake in the company.

Dickson did not return calls seeking comment.

Given the absence of debt, the new recapitalization plan has a good chance of winning approval, Jacques says. Under different circumstances, allowing a single investor to accumulate such a large ownership stake might give regulators cause for concern, but the fact that Dickson first invested in FNBH during the depths of the financial crisis will probably work in his favor.

"It can only impress regulators to see that an individual came in and risked a large sum of money while the financial crisis was going on," Jacques says.

FNBH did not identify the other investors who have agreed to buy the remaining $9.6 million of preferred stock. All told, FNBH plans to issue 24.4 million share of preferred stock. The preferred stock would convert to common equity after existing shareholders authorize FNBH to issue more common stock.

For now, FNBH would treat the preferred shares exactly like common stock for the purposes of voting, dividend payments and other operational matters.

With a loan book weighted heavily toward commercial loans and commercial real estate, FNBH suffered severe losses during the recession, which was longer and deeper in Michigan than most other parts of the country.

Since 2007, FNBH has charged off more than $59 million in loans and watched shareholder equity plummet to $7.3 million at June 30 compared to $40.6 million at the end of 2007.

In fact, Dickson's involvement has helped keep the hard-pressed FNBH afloat, says John Donnelly, managing director of Donnelly Penman & Partners, a Grosse Pointe, Mich., investment bank. "He's got a deep interest in saving that bank, and I think he has single-handedly saved it from despair," he says.