Decatur Bank faces serious capital shortfall

The Decatur State Bank is short roughly $10 million of the capital it needs to regain compliance with a federal enforcement action. The bank has little wiggle room for future losses unless it can raise the needed money or find a suitor.

Losses continued to erode precious capital in the recent quarter ending Sept. 30, according to financial reports filed with the Federal Deposit Insurance Corp. on Wednesday (Oct. 31).

The bank was treading on thin ice with just $2.954 million in equity capital to start the third quarter. It then posted a net loss of $691,000 in the recent three- month period after it put $632,000 toward its loan loss reserves.

For the first nine months of 2012, Decatur State Bank showed losses of $3.769 million, which compared to a net loss of $12.133 million during the same nine months of 2011.

While the losses are slimmer, analysts say with capital levels fatally low, the bank really can’t afford to suffer another down quarter unless more capital is infused. The bank’s Tier 1 leverage ratio – a key metric used to determine solvency by regulators – stood at 2.16% to start the third quarter.

The minimum to stay open for business by law is 2%, according to Tim Yeager, Arkansas Bankers Chair at the University of Arkansas.

Bank owners have injected $2.1 million into equity capital since June, which has likely kept the bank afloat and bought it a little more time to find a suitor.

The Tier 1 leverage ratio increased slightly to 2.55% following the recent cash infusion from bank ownership.

Yeager described the scenario as a vessel working to stay afloat in a rough storm, but leaking water from the bottom. He said there is only so long before it sinks, unless help comes to rescue or the leak can be stopped.

OWNERSHIP STRUGGLES
The bank was chartered in 1954 and has long been owned and operated by the Late Lloyd Peterson, poultry pioneer and founder of Peterson Farms, and subsequently his daughter and grandson Debra and Blake Evans.

Debra and Blake were also directors in Arkansas National Bank which was closed by regulators for insolvency in May 2008 and reopened as Pulaski National and now IberiaBank.

Ahead of Lloyd Peterson’s death in October of 2007, the bank had assets in excess of $287 million and one of the healthiest balance sheets among peer banks nationwide.

Within nine months of Peterson’s death, his family would sell their namesake poultry processing operation to neighboring Simmons Foods.

Blake Evans had taken over as CEO of Peterson Foods in 2005 and at the time vowed to grow the company’s marketshare – then the fourth largest broiler processor in the state.

Evans said at the time of the sale that high grain costs and deteriorating margins led to the family decision exit the poultry business. He stated that the company’s beef farms and the poultry genetics business his grandfather championed would not be sold. In 2010, Avigen Group bought the “Peterson Male” genetics line from the family for an undisclosed amount of money.

In September, L&L Farms – a last piece of Peterson Farm’s remaining holdings – was put up for auction. There were 3,200 acres of the family farm used for cattle breeding and Peterson’s Polled Santa Gertrudis genetic line.

Gloria Gilleland, auction manager for Tulsa-based Williams & Williams Auctioneers, said roughly 51% of the tracts were sold, but only one has settled. She did not release the amount of total sales. She said 34 of the parcels had opening bids of $500 per acre and four larger parcels, which each had a home located on the premise, had opening bids of $5,000 per acre.

The auction house said the tracts not selling reverted back to the registered owner L&L Farms.

DEAL PULLED
A deal between Mathias Bancshares and Peterson Holding Company that would have transferred ownership of Decatur State Bank was recently nixed by federal regulators.

Larry Olson, spokesman for Mathias Bancshares and CEO of First State Bank Northwest Arkansas, confirmed the application to acquire Decatur State Bank was withdrawn back in September.

“The Federal Reserve simply did not like the way we had the acquisition deal structured, and they expressed that they were not inclined to approve the deal as proposed. So, we withdrew it. However, Mathias continues to be interested in acquiring Decatur State Bank,” he said.

Olsen noted in a e-mail on Wednesday (Oct. 31), that there was “nothing new to report on the Decatur State Bank front.”

The bank came under a federal enforcement action by the FDIC in November of 2011, which requires that it raise needed capital, collect or charge-off non-paying loans and curtail any new lending of large portion without regulator approval. (The FDIC is the principal federal regulator for the state charted bank and works in concert with the Arkansas State Bank Department.)

There are some 770 banks deemed as troubled institutions by the FDIC, and 47 banks have failed this year as of Oct. 26, according to FDIC records.

The FDIC says prior to a bank closure it shops around for potential buyers that can swoop in and work with them to transfer ownership and ensure customer accounts remain open with as little disruption as possible. In order to entice buyers to take a risk on a sick bank, the FDIC usually sweetens the deal with an agreement to mitigate some of the losses, should they they occur.

Insiders agree that potential suitor banks for Decatur State might be waiting for some loss guarantee from the FDIC.

LOOKING AHEAD
There are a couple of ways to raise capital ratios – cash injection or working the other side of the equation and shrinking assets.

Decatur Bank average assets at the end of September were $127.4 million, down from $173 million a year ago. The bank’s assets consist of 12% federal funds and 8% securities, with 69% in loans.

Yeager said the securities and federal funds are needed for adequate liquidity and calling loans in early could put more borrowers in financial trouble adding to the bank’s delinquencies. The loans paying on time, are needed to help drive future revenue for the bank.

“It looks like they have shrunk about all they can,” he said.

Non-performing loans are a good indication of risk still lurking on bank books which could further erode capital levels.

Decatur Bank reported roughly $20 million in seriously delinquent loans at the end of the third quarter. The bank had set aside just $5.28 million in reserves, giving it a coverage ratio of about 25%, way short of the normal 80% coverage found in healthy banks, Yeager said.

John Dominick, analyst and banking professor at the University of Arkansas, says it is a sure bet more money will need to be set aside for reserves in the next few quarters. That money comes from either retained earnings or is siphoned from equity capital in the case of net losses.