Six Years in a Penalty Box: A Small-Bank Reg Order Tale

Ready to leap into the future, but one foot still stuck in the past.

That is the story of many community banks, and especially true of the $329 million-asset FNBH Bancorp in Howell, Mich., which took a body blow during the crisis and recovered, yet is having an unusually hard time convincing regulators that it is ready to move forward.

Six years ago, the bank's ratio of nonperforming assets to total assets topped 14% and Chief Executive Ron Long admits much of his time since then has been spent cleaning up that mess.

"We've been really focused on problem-asset remediation," Long said in a recent interview. "We've kind of had our horns pulled in."

Now, finally, FNBH, the holding company for the last locally headquartered bank in Michigan's Livingston County, appears to be turning the corner. Although net income through June 30 was a modest $494,000, deposits and capital ratios have been trending upward. More importantly, nonperforming assets declined to 2.25% of total assets — the lowest level since midway through 2006.

"We're gaining some momentum," Long said. "We're not where we want to be but we're making progress."

One group that seems less impressed with FNBH's turnaround is its regulator, the Office of the Comptroller of the Currency. Over the past 20 months, OCC has terminated more than twice as many enforcement actions as it has put in place, but it continues to hold FNBH under a consent order. Indeed, the bank has been operating under OCC consent orders requiring it to hold extra capital and seek regulatory approval for new operating initiatives for six years.

The original order was put in place in September 2009. It was replaced with the current version in October 2013.

Neither the OCC nor Long would discuss the status of FNBH's consent order.

With asset quality issues increasingly under control, the company's most pressing challenge now is enlarging its loan book. Growth has been flat the past twelve months, and with margins continuing to tighten, revenue for the first half of 2015 took a hit, falling 2.6% from the same period in 2014 to $5.9 million.

FNBH has been able to offset the fall in revenue with tight expense control. Through June 30, noninterest expenses were running 7% below the same period in 2014. The cost-cutting will likely continue into the third quarter as FNBH has filed notice to deregister its stock with the Securities and Exchange Commission.

First National Bank, FNBH's bank subsidiary, has been a significant commercial lender historically, but Long said he is pinning his hopes for growth in the near term on mortgages and indirect automobile lending. Indeed, new ties with a number of dealerships have already resulted in increased production. FNBH's indirect portfolio grew 43% the past 12 months, to $4.85 million.

The company hopes to repeat those results in mortgages, where it recently received supervisory non-objection to expand its operation. "We've got lots of opportunities to do well in residential lending," Long said.

FNBH remains significantly smaller than it was at its peak, in 2006, when its assets totaled $474 million.

But J. Timothy O'Rourke, chairman and CEO of Matthews Young Management Consulting in Hillsborough, N.C., said it is lucky to be in business. A former community bank CEO, O'Rourke noted that FNBH's Texas ratio hit 145 in 2010. As of mid-2015 the ratio had fallen below 20. (Texas ratios greater than 100 are considered warning signs of a possible failure.)

"This bank could easily have been seized at that point and given to the [Federal Deposit Insurance Corp.]," he said.

The company held on, however, and while Long nursed the loan portfolio back toward health, a group of private and institutional investors, including Howell native Stanley Dickson, injected more than $16 million of fresh capital.

The pivotal question of when the OCC will terminate FNBH's consent order is far from academic. The company lost more than $40 million between 2007 and 2011, so emerging from regulatory scrutiny would pave the way for it to reap a substantial deferred tax asset windfall.

According to O'Rourke, it is likely the regulator is still not comfortable with the bank's level of problem loans. "From the standpoint of the regulatory agency, they've come a long, long way, and things are very encouraging, but they've still got a long way to go."

Long said he was confident FNBH's asset quality would continue to improve and O'Rourke sees no reason to doubt that.

"The way things are going it's probably just a matter of time," O'Rourke said.