U.S. Treasury will auction One Bank & Trust in hope of recovering TARP debt

Little Rock-based One Bank & Trust will soon have a new owner once it’s auctioned to the highest bidder. The suitors expressing interest in the $300 million bank include: Arvest Bank of Fayetteville, Home Bancshares of Conway, Bank of England and First Financial Bank of El Dorado along with private equity firm EJF Capital LLC of Arlington, Va.

It’s been several years in the making but what began as a twisted plot by bank officials to participate in the federal government’s banking bailout known as TARP’s Capital Purchase Program in 2009 is now putting the bank on the auction block.

One Bank & Trust’s holding company One Financial secured $17.3 million in capital from the Treasury’s TARP program. Money that is still owed in full. But fraud into how the bank failed to disclose all relevant financial information became evident several years ago when bank ownership at the time — Layton P. Stuart — was found to have also diverted $1.5 million of the TARP proceeds toward personal use. The U.S. Government sued Stuart’s estate in 2015 and did recover $3.88 million related to a $4 million False Claims action, according to a recent TARP report to Congress filed in April.

That report also states on June 28, 2016 the U.S. Government completed a settlement of several lawsuits related to the Treasury’s investment in One Financial Corp. The result of those settlements granted the Treasury 355,227 shares of One Financial Corp. common stock — majority ownership.

Bank officials confirmed to local media the auction of those shares is expected to take place in Washington, D.C. sometime next month.

Talk Business & Politics asked banking insiders and experts to sum up what makes this attractive for the suitors said to be doing their due diligence.

Tim Yeager, Arkansas Banker Chair at the University of Arkansas, said this deal is interesting because it’s not like a typical troubled bank being sold. While One Bank & Trust lost $5.847 million last year with four straight quarters of red ink, the bank does have some value in its core deposit base which totals more than $219.67 million at the end of 2016. The bank’s total deposits at that time were $263.66 million.

Yeager said the bank’s capital levels are low with just over $12 million in equity capital at the end of 2017. He said whomever buys the bank will need to infuse more capital to get the capital ratios up to normalized ranges for banks today post Dodd-Frank. The bank has been ordered to keep total capital to at least 12% of its risk-based assets, a threshold it’s well below.

While Arvest Bank and Home Bancshares (Centennial Bank) have grown considerably through prior acquisitions, this would be the first time they either have bought a bank’s majority interest from the U.S Treasury. In most cases, banks are auctioned after they fall into receivership or if their holding company filed bankruptcy such as with Metropolitan National.

Yeager said it’s not common for the Treasury to be the one auctioning off a bank, but this is just part of the government’s continued efforts to wind down the TARP and CPP programs, which were designed to a safety net not a lifeline.

He also agreed the fraud in this case is one reason the Treasury is vehemently collecting the money owed.

John Dominick, banking professor at the University of Arkansas and private banking consultant, said aside from One Bank’s core deposits the bank also has several high-profile locations that might be of interest to the suitors.

Dominick said Centennial and Arvest, given their size, won’t see a huge benefit from picking up a $300 million bank, but it would give each of them a slight boost to their core deposit market share in the Little Rock metro area. Bank of the Ozarks holds the biggest share at 20.8%, Bank of America is No. 2 at 19.14% and Centennial Bank is third at 10.20%. Arvest Bank is sixth at 7.47%. Adding in the One Bank deposits to Arvest’s would put the Fayetteville-based bank in fifth place ahead of First Security Bank in terms of deposit market share.

Dominick said the Bank of England, a well-capitalized bank in its own right, has a lot more to gain from winning the bid. The Bank of England is roughly the same size as One Bank and by consolidating, the Bank of England would essentially double in size. The bank ranks 13th in deposit market share but with the assets of One Bank the pro forma bank would move up to 10th place with combined deposits of $477.9 million. What’s more, the bank’s locations would grow from one in Little Rock to nine.

Dominick said First Financial Bank in El Dorado would also likely benefit greatly from winning the bid. He said the El Dorado bank has been trying to grow its business around the state, which is expected given the slower growth in the southern half of the state. The El Dorado bank already has lending offices elsewhere. With more than $886 million in assets, the bank is also well-capitalized with $113.623 million. Last year, the bank had net income gains of $31.979 million and ROA of 3.61%. The bank has strong core deposits of more than $558 million. Dominick said eight new locations in Little Rock would no doubt help to boost this bank’s already strong balance sheet.

He said the banks have no doubt been doing their own due diligence and deciding what risks make this a good deal or not. He said it’s not unheard of for bids to be negative if the risks are great enough. While that’s doubtful in this case, Dominick said suitors have actually been paid by the government to take over a troubled institution.

One Bank’s management has said the work to clean up the ship has taken 4.5 years, but it’s now ready for a new captain.