In summer 2022, American State Bank was on a path of rapid growth, doubling its head count partly thanks to poaching entire teams from Happy Bancshares Inc. subsidiary Happy State Bank and gearing up to launch a national digital bank.
But now the Arp, Texas-based bank is cutting back in the wake of worsening financial performance and compounding regulatory and legal problems for the bank and its holding company, Steele Bancshares Inc. As financial, legal and regulatory pressures mount, it is unlikely the bank can remain independent, deal advisers told S&P Global Market Intelligence.
"My professional opinion is that in 18 to 24 months, this is not an independent company," a veteran depository investment banker said in an interview.
The investment banker thinks the list of potential buyers is long and any number of regional banks in Texas or surrounding states with an interest in American State Bank's Eastern Texas markets could mark the balance sheet to market, cut costs and make the bank profitable again.
Selling is likely one of the strategic alternatives American State Bank considers given the requirements of the regulatory agreement, Samco Capital managing director Jacob Thompson said in an interview. Texas banks in the area and Louisiana banks looking to establish a foothold in Tyler and Smith counties could be interested, he added.
But Chip MacDonald, managing director of MacDonald & Partners LLP, thinks finding a willing buyer will be a challenge. A potential buyer "would not pay a whole lot for it because of the complexity and the risk," MacDonald said in an interview.
Therefore, it is possible buyers will not be interested in American State Bank outside of a purchase and assumption agreement with the Federal Deposit Insurance Corp. following the bank's failure, MacDonald said.
"You'd be buying just assets and liabilities from a receiver and you wouldn't be getting exposure to those existing lawsuits," MacDonald said.
The regulatory agreement could scare off potential buyers, but it does not necessarily make the bank unsellable, Thompson said. Even so, any buyer will have to do an extensive due diligence process, he said.
American State Bank and Steele Bancshares did not reply to request for comment in time for publication.
Worsening financial performance
At 2023-end, American State Bank had 131 full-time employees, nearly half of the 250 employees it had at 2022-end, but up from 123 at the end of 2021, according to Market Intelligence data.
The bank's capital ratios have also been on a roller coaster. Its common equity Tier 1 ratio dipped to 6.79% in the first quarter of 2023 while its leverage ratio also fell to 6.13% then. But those ratios have since improved to 9.42% and 7.77%, respectively, in the fourth quarter of 2023 after the Federal Reserve flagged "safety and soundness deficiencies" in the bank's May 2023 exam, according to an enforcement action handed down by the Fed on March 29.
Those trends, plus the bank's recent announcement that it is selling nine of its 13 total branches to BOM Bank, showcase its pivot back to shrinkage after rapid growth in 2022.
Deposits at the branches pending for sale account for $154.9 million of American State Bank's $850.7 million of total deposits based on June 30, 2023, Statement of Deposits filed with the FDIC. Branch sales reduce deposits and can help banks shrink their assets and improve capital ratios.
The branch sale comes after American State Bank's financial performance has suffered over the last year.
American State Bank's credit quality and profitability also fell short compared to peers and the industry more broadly at 2023-end. The bank's nonperforming assets as a percentage of total assets, nonaccrual loans as a percentage of total loans and leases and net charge offs as a percentage of average loans were all higher than their respective peer group and industry medians.
At the same time, return on average assets and return on average equity were lower than peer group medians while its efficiency ratio shot up to 111.42%.
Furthermore, the bank's cost of funds climbed and its yield on earning assets fell, leading to a steady decline in its net interest margin to 2.62% in the fourth quarter of 2023 from 4.05% at the end of 2022.
Regulators bear down
That worsening financial performance was partly the subject of an enforcement action handed to the holding company and bank from the Fed on March 29. The enforcement action touches on almost every aspect of American State Bank's operations, requiring the bank to submit written plans to improve its board and management oversight, corporate governance, credit risk management, asset quality, liquidity, capital, earnings and compliance.
Complying with the written agreement could take as long as two years for American State Bank, the veteran bank adviser said in an interview.
The agreement requires Steele Bancshares to act as a source of strength for the bank, but the weight of the holding company's debt obligations could throw a wrench in that obligation.
Steele Bancshares completed $25 million in subordinated debt notes in October 2021 through two placements. The company's long-term borrowings have remained steady since then, sitting at $24.5 million at year-end 2022 and 2023, but accrued interest payable shot up to $801,000 at year-end 2023 from $247,000 at the end of 2022, according to Market Intelligence data.
The veteran adviser said the jump in accrued interest payable suggests Steele Bancshares might have missed a payment on the sub debt obligations, which likely concerns the Fed that the holding company is able to serve as a source of strength.
This issue is further complicated by the enforcement action, which states both the holding company and the bank cannot engage in capital spending initiatives such as dividends or paying interest on sub debt without prior regulatory approval.
Lawsuits pile up
Further complicating the holding company and bank's woes is a number of lawsuits.
American State Bank, the holding company, and Brandon Steele — the founder of the holding company who stepped down as chairman of American State Bank's board
Steele did not reply to a request for comment.
In another lawsuit against Steele himself and both American State Bank and the holding company, shareholders are accusing the holding company CEO of securities fraud related to a private stock offering that raised approximately $38 million.
Brandon Steele himself is also the center of a lawsuit that ties back to the holding company.
According to a lawsuit, Steele has defaulted on loans from Texas Capital Bancshares Inc. unit Texas Capital Bank.
Steele secured the loans with Steele Bancshares stock and under the order of the receiver, Texas Capital is allowed to sell the shares to recover proceeds. Steele owns 100% of the outstanding shares of Steele Bancshares, according to the order of receiver.
Texas Capital did not reply to request for comment.
The mounting lawsuits, coupled with a sweeping enforcement action and deteriorating financials make American State Bank's future murky, especially if it were to explore a sale.
"The facts are so convoluted that it would take somebody a long time to get their hands around it and solve all the problems," MacDonald said.