FNBH Bancorp in Howell, Mich., is operating free and clear of regulatory constraint for the first time in more than seven years.
The Office of the Comptroller of the Currency last month terminated a consent order with the company's bank, First National Bank. The $356 million-asset bank had operated under one form of regulatory action or another since October 2008.
The termination is a significant milestone for FNBH. It paves the way for its holding company to realize an $8.5 million deferred-tax asset "sometime in the not-super-distant future," Chief Executive Ron Long said in a recent interview. It also allows it more time to focus on the modernization of its core processing system, which should be completed early next year.
FNBH is among several community banks, including the $404 million-asset Broadway Financial in Los Angeles and the $737 million-asset Carver Bancorp in New York, that have been released from long-running enforcement orders in recent months.
Terminations have far outpaced new enforcement orders, reflecting improved health in the banking industry. For instance, the OCC has terminated 71 enforcement actions this year while issuing just 40 new orders.
Freedom from close regulatory scrutiny allows banks to devote more time and money resources to growth initiatives, experts say.
"There is a cost to monitoring issues identified in a regulatory order," Paul Hughes, a consultant who has worked closely with Broadway Financial, said in an interview Friday. "All of that takes time and effort."
Before it was freed on Nov. 30, Broadway had operated under an OCC consent order for more than two years. A five-year-old cease-and-desist order with the Federal Reserve remains in place, but Hughes said he is hopeful it too will be terminated soon.
Hughes said Broadway's turning point came in 2013, when it was able to sell about $25 million of nonperforming loans in two transactions.
Now, with its regulatory difficulties nearly behind it, Broadway plans to focus on building its multifamily loan book. The company has originated more than $110 million in multifamily loans in 2015, according to CEO Wayne-Kent Bradshaw.
FNBH's troubles were largely tied to defaults on construction and commercial real estate loans.
Before the financial crisis, FNBH's First National Bank was one of Michigan's better-performing banks, said Long, who joined the company in May 2008. But the lengthy recession in manufacturing-dependent Michigan hit the state — and its banks — hard.
Thirteen Michigan banks failed between 2008 and 2012. The poverty rate, which totaled 10.5% in 2000, now tops 16%, based on the most recent data from the Census Bureau. In Livingston County, where Howell is located, the number of residents living in poverty more than doubled over the same period, jumping to 6.4% of the population. For four decades prior to the last recession, the county's poverty rate had fallen steadily, from 17.4% in 1960 to 3.4% in 2000.
FNBH suffered along with the rest of the state.
The company had just reported a $1.6 million quarterly loss in October 2008 when it signed a formal agreement with the OCC; its ratio of nonperforming loans to total loans was nearing 10%. The agreement required FNBH to hire a chief credit officer, obtain an independent review of all problem loans and perform quarterly reviews of criticized loans in excess of $500,000.
A consent order, which replaced the formal agreement in September 2009, required FNBH to draft a new strategic plan and boost total capital to 11% of risk-weighted assets. FNBH was unable to meet the order's capital requirement until December 2013, when Detroit lawyer Stanley Dickson invested $7.1 million.
Dickson's recapitalization proved to be the catalyst for FNBH's comeback, Long said.
The company earned nearly $3.1 million last year, although the results included a $2.5 million reversal to its loan-loss reserve. FNBH earned $2.1 million through the first nine months of 2015. The ratio of noncurrent loans to loans, which peaked at roughly 16% at the end of 2009, is down to 3.6%, while nonperforming assets, including foreclosures, equal a more modest 2.1% of total assets.
First National Bank's roots in Howell go back to 1891, when a predecessor, First State and Savings Bank, opened its doors. First National was chartered in 1934; it bought First State 12 years later.
FNBH has no plans to do any "wild and crazy stuff" now that its regulatory order has been terminated, Long said. The OCC raised no objections to its current recovery plan, which focuses on increasing its residential and indirect automobile lending and expanding its capabilities in wealth management.
"We've got those programs off the ground," Long said. "Now we want to push them further down the road. We're just going to keep our nose to the grindstone."
Long said he had no ill feelings toward regulators for keeping the bank under an enforcement order for seven years.
In his view, the examiners who supervised FNBH operated with a "team approach" while the company was under enforcement.
"We felt as though they wanted us to survive," Long said. "I can't really complain."
Long, moreover, said he is a better banker and First National is a better bank as a result of the supervisory experience.
"We've enhanced our processes, procedures and policies," he said. "We're a fundamentally stronger bank."
Broadway views its time in the regulatory penalty box in a similar light, Hughes said.
"The truth is, the procedures we have in place today are better," he said. "The board does a better job of monitoring, and the bank's processes of originating loans and reviewing them are better."