Hillcrest Bank, Overland Park, Kansas, Collapses Under Bad Loans

October 22, 2010 – Hillcrest Bank, Overland Park, Kansas, a $1.6 billion dollar asset institution, became the largest banking failure this week.  Regulators also closed six other banking institutions in Florida, Georgia, Illinois and Arizona.

Hillcrest Bank was closed by the Kansas Office of the State Banking Commissioner, which appointed the FDIC as receiver.  The FDIC sold the failed bank to Hillcrest Bank, National Association, Overland Park, Kansas, a newly chartered bank subsidiary of NBH Holdings Corp., Boston, Massachusetts.   Hillcrest N.A. will assume all deposits and purchase all assets of the failed bank.

All 41 branches of Hillcrest Bank will reopen on Saturday to allow depositors access to their money.  All depositors will automatically become depositors of the Hillcrest Bank, N.A., with no interruption in service or FDIC deposit insurance coverage.

Hillcrest Bank had total assets of $1.65 billion and total deposits of $1.54 billion at June 30, 2010.  Hillcrest Bank N.A. did not pay a premium on the acquired deposits.   The FDIC provided protection against losses on the assets purchased by Hillcrest Bank, N.A. by entering into a loss-share transaction with Hillcrest Bank N.A.

Loss sharing is a common feature of purchase and assumptions agreements used by the FDIC to move failed bank assets into the private sector.  Under a loss share agreement, the FDIC agrees to absorb a certain portion of losses on a failed bank’s assets that are purchased by an acquiring bank.  The FDIC has now entered into loss-shares agreements covering over $80 billion in failed bank assets.  Since certain assets are covered for up to 10 years, the ultimate gain or loss by the FDIC under loss-share transactions is impossible to predict.  If real estate markets do not recover, the FDIC’s losses will greatly exceed the currently estimated amounts.

NBH Holdings Corp is owned by a private equity group based in Boston and run by former executives of Citizens Financial who raised over $1 billion in capital to start NBH.   According to NBH CEO Timothy Laney,  “We want to bring secure and reliable community banking back to customers, with the level of service and quality of products that people want and deserve from their local banks.”

Newly chartered banks funded by private equity have acquired other failed banks in the past several years, producing billions in quick profits for some investors.  See OneWest Investors Make Billions on Failed Bank Purchases.

Hillcrest Bank failed under a mountain of troubled loans as indicated by a sky high troubled asset ratio of 572% compared to a national average of 15%.  Virtually all failed banks in the past several years have had troubled asset ratios of 100% or greater in their final quarter of reported data.  Once a bank reaches a troubled asset ratio of 100% or greater, recovery becomes a remote prospect.  The question of why regulators do not promptly close banks that have no prospect of recovery remains an open question.  (See discussion on Why Problem Banks Are Allowed to Stay Open).

Hillcrest Bank had been under regulatory orders to raise additional capital since December 2009 and the Kansas Banking Commissioner cited excessive levels of delinquent loans.  As of June 30, Hillcrest Bank’s risk-adjusted capital ratio was 1.6%, far below the 8% required by regulators.  As Hillcrest was seeking to raise $100 million in capital to offset continuing loan losses, Hillcrest CEO Jeff Wheeler seemed unduly optimistic stating that  “We continue to have a cooperative relationship with our regulators.  There haven’t been any new directives issued or anything like that. As we keep them apprised of the options we are considering, I think they share in our optimism about a probable outcome that provides a solution for us.”

Despite massive loan losses, inadequate capital levels and regulatory sanctions, the Hillcrest Bank website had the audacity to proclaim Hillcrest as safe and secure, built on solid growth and conservative by nature.

Hillcrest Bank » Corporate Information » The Hillcrest Difference Smart.

Hillcrest Bank began as a partnership between two families over 30 years ago. Today Hillcrest Bank remains privately owned and headquartered in greater Kansas City. Swift execution, decisiveness and flexibility are hallmarks of the bank resulting in growth to $1.6 billion in total assets.  Our success is attributed to our solid growth plan built upon our 30 years in business as a commercial bank and our unyielding focus on our customers.

Experienced.

As the fourth largest privately–held bank in Kansas City, at Hillcrest Bank people and technology make the difference. Our continued ranking among the Top 50 Privately Held Companies in Kansas City is a testament to our focus on doing the right things well, the things that mean the most to our customers and the continued safety, security and growth of this institution.

Strong.

At Hillcrest Bank we think like businesses rather than bankers. We are a conservative bank by nature and by practice. We did not participate in sub-prime lending. Our deposit and customer growth has been strong in 2010, a reflection of our well known brand, increased presence in growing markets such as Dallas, Austin and Denver, and the continued flight of U.S. funds to the security of strong FDIC-insured commercial banks.

Hillcrest Bank is the 138th banking failure of the year and the third in Kansas.  The cost to the FDIC Deposit Insurance Fund for Hillcrest Bank’s failure is estimate at $329.7 million or 20% of total assets.

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