Posted on Fri, Sep. 03, 2010

Troubled KC area lenders struggle to fix loan, capital and other problems

By MARK DAVIS

The Kansas City Star

Trouble continues to circle Kansas City’s struggling banks — but so do potential buyers.

A review of the latest financial reports for all area banks shows that bad loans and capital shortages have not eased among the area’s most troubled lenders. Twenty area banks operate under agreements with regulators to cure loan, capital or other problems.

Those pressures have some bank owners looking harder for deals.

Potential investors know they’re talking with increasingly motivated sellers. But the buyers have their own reasons to shop harder, because the Federal Deposit Insurance Corp. is offering fewer sweetheart deals when failed banks come up for bid.

“The failed-bank market is getting too competitive,” said banking lawyer Bob Monroe. “It’s too expensive. You’re not assured you’re going to win.”

Finding that they need each other, buyers and sellers are coming to terms.

•The owners of Bank Midwest, one of the area’s largest banks, have agreed to strip out problem deals and sell the cleaned-up bank to a Boston group.

•Owners of First National Bank of Olathe this week got regulatory approval to sell four of its branches to Metcalf Bank. They’re also working to sell a bank they own in Scottsdale, Ariz., to investors there.

•Union Bank, an affiliate of First National of Olathe, sold its largest Lee’s Summit branch in July and is now itself the acquisition target of a former Gardner banker.

Others, notably Hillcrest Bank and Security Savings Bank, continue to search for financial white knights able and willing to shore up their capital shortfalls.

But the financial pitfalls and the regulatory hurdles involved make all of these deals difficult.

“It’s a fairly active market in looking, but fairly selective in getting deals done,” said Bob Wray, who advises buyers and sellers as head of The Capital Corp. in Lenexa.

Still struggling

The economy’s slow recovery hasn’t helped Kansas City’s troubled banks climb out of holes.

There were as many banks with too little capital at the end of June as there were when the year started. And the number of banks with more than 5 percent of their loans in doubt hasn’t improved either.

For banks with the biggest problems, time has only made them worse.

Hillcrest Bank lost $62.9 million in the first half of this year, according to reports this week from the FDIC. That was on top of $83.5 million it lost last year. At the end of June, 15 percent of its loans were considered problems.

“It’s a result of our concentration in real estate loans,” CEO Jeff Wheeler said.

Wheeler said the bank had continued to set aside more of its own funds to cover potential losses on loans as the value of the real estate securing the loans had fallen.

Security Savings Bank, a $508 million lender based in Olathe, reported $14 million in losses through the first half of this year, following $21.4 million lost last year. Its problem loans account for 9 percent of its total, including some made outside the Kansas City area.

The losses have left both banks well short of normal requirements for capital backing.

In June, regulators rejected a capital restoration plan submitted by Security Savings, according to an Aug. 18 regulatory order. The order called for prompt corrective action and set an Aug. 31 deadline for owners to raise Security Savings’ capital to at least adequate levels.

CEO Michael Copeland declined to discuss the directive, but he issued a statement about efforts to improve conditions.

“We have been aggressively working to meet all regulatory requirements, most notably by actively searching for an investor to recapitalize the bank,” the statement said.

Copeland’s statement went on to say the bank had taken other needed steps, such as “shedding tainted or out-of-territory loans” and “restructuring and writing off millions of dollars of bad debt.”

The owners of Hillcrest are working on plans to pump capital into it, but they want help from outside investors, Wheeler said. He notes that owners already added $40 million in capital last year.

Still, Hillcrest sports the lowest capital levels in the area.

Wheeler said that the market for bank capital had strengthened and that several groups were interested in the bank.

“In the next 60 days, we anticipate having a solution for our capital,” Wheeler said.

Buyer interest

Two large investor-led deals were completed in other states recently. But investors are shopping here, too.

“Equity funds have looked at several of the banks in town,” said Wray, who said he had been contacted about local banks.

In the Bank Midwest deal, Dickinson Financial Corp. would keep the $4.2 billion bank’s problem assets and its branches inside Walmart stores. It would sell the name and $3 billion in remaining assets to NBH Holdings Corp. in Boston.

Paul Holewinski, CEO of Bank Midwest, declined to discuss the bank’s current status. It also suffered additional losses in the first half of this year, $49.1 million, on top of last year’s losses that totaled $301 million. About a fifth of its loans are not current, according to FDIC data.

At First National of Olathe, an $872 million bank, about a fifth of its loans are considered problems, and it has too little capital. Its losses this year have been relatively small at $6.8 million, compared with $55.2 million last year.

The branch sale to Metcalf Bank will boost First National of Olathe’s capital levels. And its holding company’s sale of the Arizona bank would improve the capital resources of the company.

First National of Olathe’s holding company also would benefit from a deal to sell its 60 percent ownership in Union Bank’s parent company. Banker Peter J. Fiene, who could not be reached for comment, is awaiting approval to buy Union Bank.

Experts note that deals to buy or pump needed capital into troubled banks are difficult not only to negotiate but also to usher through the regulatory approval process.

Regulatory approval also can take longer than expected.

Metcalf Bank’s approval to buy branches from First National of Olathe took longer than the buyers anticipated. And Metcalf’s parent company, Central Bancompany in Jefferson City, is still waiting for final word on its October 2009 agreement to buy Bank of Belton.

The Bank Midwest sale should be completed in the early fall, said Tom Metzger, an official of the Boston-based buyers who will become the bank’s CEO after the sale.


Problem spots
Among 118 banks in the area, most posted profits and few problems at midyear. But some troubles remain:

•A total of 29 banks lost money in the first half of the year.

•Loan problems topped 5 percent of all loans at 31 banks.

•Five banks fell short of at least one regulatory measure of capital.

For financial information on all 118 banks with branches in the Kansas City area, go to Dollars & Sense at economy.kansascity.com.

To reach Mark Davis, call 816-234-4372 or send e-mail to mdavis@kcstar.com.

Posted on Fri, Sep. 03, 2010 10:26 PM



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