Could Douglass National Bank's days be numbered?
The African-American-owned bank in Kansas City, Mo., which is awash in bad loans and has nearly depleted its capital, is looking like it could be the first bank to fail this year, according to industry observers.
Neither the Federal Deposit Insurance Corp. nor the Office of the Comptroller of the Currency would discuss the speculation, but Bert Ely, an independent consultant based in Alexandria, Va., said, "Unless someone charitably dumps a bunch of capital" into the bank, it is "going to fail."
The 25-year-old unit of Douglass Bancorp Inc. has been losing money and assets for two years and has been operating under a regulatory order since March 2006. More than a quarter of its commercial real estate loans were past due as of Sept. 30, according to FDIC data.
The bank had a deal to sell itself, but it fell through in October, and William Michael Cunningham, social investing adviser with Creative Investment Research Inc. in Washington, said he has been wondering since then if Douglass could survive on its own.
"Given the trouble they have been in and the problems they have — lack of income, a buyer backing out, and real estate issues — it just wouldn't surprise me if they had reached the tipping point," Mr. Cunningham said.
Douglass lost about $5.8 million from Oct. 1, 2005, through Sept. 30, 2007, and its assets shrank 43% in that time.
At the end of 2005 its percentage of noncurrent loans was already about six times higher than the national average for banks with less than $100 million of assets — and the percentage has more than tripled since then, to 17.2% of its $33 million portfolio.
Though it is evident that Douglass has been struggling for some time, Mr. Ely said regulators may have cut it some slack because it is a certified community development financial institution with a mission of redeveloping long-neglected communities.
He pointed out that at Sept. 30 the $59 million-asset bank had less than $1.5 million of Tier 1 capital, for a leverage ratio of less than 2.5%.
According to FDIC data, the average ratio for commercial banks with less than $100 million of assets was just under 13%.
In March 2006 the OCC ordered Douglass to develop a capital program and a lending policy, among other things.
In August the bank announced that it had a deal to sell itself to the $821 million-asset First Guaranty Bancshares Inc. in Hammond, La., for $2.5 million. However, First Guaranty backed out in early October, saying that Douglass' shareholders were unlikely to approve the deal, because they wanted a higher price. First Guaranty also claimed that Douglass had failed to settle claims from its creditors, deliver proxy materials, and begin preparing financial information for 2006, according to Securities and Exchange Commission filings.
Later that month Douglass' vice chairman told the Kansas City Business Journal that he hoped to find an investor who would put $4 million into the bank to satisfy the terms of the OCC order. (Douglass officials did not return calls from American Banker.)
But Mr. Cunningham said that Douglass is likely to have trouble meeting its capital needs, because there are not many investors or investment funds looking to put money into a small minority bank with a souring portfolio.
Bank failures have been rare in recent years. Three banks failed last year, and none failed in 2005 or 2006.
However, Mr. Ely said that some small banks and thrifts that have been limping along in recent years could fail this year as economic conditions weaken.
Those with significant residential and commercial real estate exposure could be especially vulnerable, he said.
Of the three banks that failed last year, two, including the $2.5 billion-asset NetBank in Alpharetta, Ga., could trace their problems to making subprime mortgages.
