So close and yet so far away.
First State Bancorp. in Albuquerque was well on its way to satisfying regulators' capital requirements when it ran into another setback.
Under a regulatory order, the company's $3.5 billion-asset bank must boost its total risk-based capital ratio to 12%. A deal that First State made in March to sell its Colorado branches would have accomplished that.
But last week the company reported a wider-than-expected loss for the first quarter. The loss ate up so much capital that it now could take several quarters to hit the target in the September order. And in all likelihood, First State will have to do so by continuing to shrink itself; its shares are trading below book value, making an equity sale prohibitive.
"If the capital markets would free up a little, we would consider" a stock offering, H. Patrick Dee, First State's chief operating officer, said in an interview last week. "But right now we don't see that happening anytime soon." Instead, "we are going to have to manage through by shrinking the balance sheet."
Unlike so many others in a capital pinch, analysts said, First State is likely to get leeway from regulators as it tries to rebound.
"This management team has done everything in their power to achieve these thresholds the regulators are asking for," said Bain Slack, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc.
"That gives them a lot of goodwill with the regulators. They made the hard choice of selling the Colorado market that they have been building for years and wanted to be in to get their capital up."
In addition to agreeing to sell the 20 Coloardo branches to Great Western Bank in Watertown, S.D., in March, First State reduced its size by closing two branches in Utah last year and is letting the loans run off.
During the first quarter the company reduced loans by $50 million, to $2.7 billion.
Given those steps, analysts said they do not expect regulators to put pressure on the company to rush the ratio increase.
"They have time to work on it," said James M. Schultz, a senior vice president at Sterne, Agee & Leach Inc., noting that the regulatory agreement did not set a date to reach the goal.
"As long as they get themselves into a 'well capitalized' position and maintain it, I don't think the regulators are going to worry about it. … Right now the focus is blocking and tackling for the company to get the risk losses down and maintain their capital status once the Colorado deal is done," he said.
In a report published last week, Slack wrote that First State's capital ratios are merely adequate by the usual regulatory standards.
A roughly $20 million gain from the branch sale would restore the company to well-capitalized status, he wrote.
But it would leave the bank with a total risk-based capital ratio of 11.3% — well capitalized under normal standards but still short of what is required under the order from the Federal Reserve Bank of Kansas City and the New Mexico Financial Institutions Division.
The first-quarter loss of $24.4 million compared with a profit of $3.9 million a year earlier.
The loss was caused primarily by a $33 million loan-loss provision related to an increase in nonperforming assets, which rose 109 basis points, to 5.11% of total assets.
First State shares had fallen from a 52-week high of $11.86 a share in September to a low of 60 cents in March.
On Wednesday they closed at $2.02 a share, two cents higher than Tuesday's close.
Slack said it would likely take at least a year for the company to deleverage enough to increase its bank's total risk-based capital ratio to 12%.
"The problem with a bank is you can't just deleverage on the spot because you have commitments that can be drawn on," he said.
"This is something they started last year. It took a while to get out of growth mode. The 12-month range is a good time for them to get there."
Dee said First State would need to get about $30 million of fresh capital or reduce its assets by $300 million. "Most of it, if not all, will come out of Colorado and Utah," he said.
He also predicted, "Sometime next year we will return to profitability and build the capital that way."