July 16, 2009 – 3:40 pm

Below: Clips from SSB’s marketing material, touting the “divine” origins of the bank.

Clips from SSB's marketing material, touting the "divine" origins of the bank.

As questions swirl over a small Kansas-based bank’s future, one question in particular looms largest: how could regulators have let this happen?

An Investigative exclusive By Teri Buhl, reporting for the Implode-o-Meter

Executives at Olathe, Kan.-based Security Savings Bank have screamed foul for several years—but the Kansas Regional Office of Thrift Supervision has been turning a blind eye to alleged misconduct at the bank, according to numerous sources.

As confidence erodes in the nation’s banking system, and taxpayers have watched as banking giants Washington Mutual and IndyMac fail, many are now left wondering how government regulators could not have seen this coming. Lack of enough experienced regulatory staff to sniff out rotten balance sheets is often times labeled as the primary cause for failing to detect problems before a bank is seized; other times, the need for an orderly failure process is cited.

But what about a case where a bank’s own executives have continued to proactively knock on their primary regulator’s door, with little to no response? Kansas’ Security Savings Bank appears to be one such case—and now the thrift is booking ongoing million dollar quarterly losses, distributions have dried up, and investors in the bank’s holding company recently settled in their favor in a suit against the banks chairman- they had sued for securities fraud.

The Kansas-based, federally-chartered savings bank is chaired and owned by longtime real estate developer and home builder Donald H. Bell, Sr. In a brochure touting the bank’s purpose in the community it serves, Bell markets the fact that “God had directed him” to buy a small Kansas bank, so that he may forward the bank’s profits towards Godly ends. He is known to staff the bank with friends from his local church, and from a local Nazarene College he supports.

A Kansas Republican Party spokesperson told The Implode-o-Meter that Don Bell has been an important contributor to the Republican Party in past elections.

Problems in Security Savings’ commercial loan underwriting process first started to show up in 2004, when the board discovered that the bank had extended multi-million dollar loans to a powerful and well-connected member of the so-called “religious right,” Pastor Carl Herbster.

While it is typical for business owners to use their businesses to support causes they believe in, Bell went so far as to install Olathe’s Nazarene mayor Mike Copeland as CEO at the bank in early 2008. Alongside city commissioner John Bacon, who serves on the bank’s board of directors, they’ve been busy changing the world. A government filing shows that Bell also chairs the Faith Family & Freedom of Kansas PAC, and donated near $100,000 to the religious Republican-based lobby group—some of those funds were used to get bank CEO Mike Copeland elected, and support the election of the county’s district attorney, Phill Kline, as well. The funds also support the implementation of a “pro-life” agenda and fuel efforts to get creationism taught in Kansas schools.

Bell’s leadership pushed and pulled his bank to over $830 million in assets (as of July 2008) by originating “friendly” loans on commercial projects to those he worships with, sources who have worked on deals with Bell say. The bank engaged in risky development loans on residential land and home construction loans, including lending on a suburban golf course now overgrown with weeds, by operating an Internet mortgage division for a number of years and by making loans to associates from whom Bell personally stood to benefit, according to sources interviewed for this story.

Problems simmer

Problems in Security Savings’ commercial loan underwriting process first started to show up in 2004, when the board discovered that the bank had extended multi-million dollar loans to a powerful and well-connected member of the so-called “religious right,” Pastor Carl Herbster—while Bell was secretly investing in and around land owned by Herbster’s Tri Cities Baptist Church. Church members complained that the church’s land was being converted to speculative commercial land in Missouri. And the bank’s board of directors and senior management team reported this apparent bank violation and other related issues to regulatory supervisor Don Kramer, the district manager in Kansas City’s office of the Office of Thrift Supervision.

When Bell was confronted by the management group, and told of their whistle blowing ways with the OTS, he apparently took action to have the entire team fired.

“The outside directors and senior management of Security Savings Bank informed the OTS and auditors of the bank that Bell was out of control—bullying and threatening staff members, stacking the commercial loan committee to push through loans he demanded be done for friends, and routinely using the bank as a vehicle for his own personal gain,” said a former bank executive, under condition of anonymity. “The OTS was handed information about internal issues within the bank concerning corporate governance and conflicts of interest issues on the part of Don Bell, and his CEO, Kevin Gilmore. As a result, the bank’s executives and the Board were all removed from their positions, to make way for Don and Kevin to continue business as usual.”

According to the same banker, the OTS’s Kramer routinely reinforced that the OTS would stand behind the managers in their quest to do the right thing, and promised that neither management nor the board would be displaced for the actions they were taking to rectify the situation at the bank. When push came to shove, however, the OTS did nothing and allowed Bell to get rid of them all, this source says. It’s not clear if Kramer had told his Dallas-based bosses—regional director Fred Casteel, or assistant regional director Gary Scott—about the reported banking infractions.

“The outside directors and senior management of Security Savings Bank informed the OTS and auditors of the bank that Bell was out of control—bullying and threatening staff members, stacking the commercial loan committee to push through loans he demanded be done for friends, and routinely using the bank as a vehicle for his own personal gain.”—former Security Savings executive, on condition of anonymity.

An OTS spokesperson would not comment on Kramer’s work with Security Savings or any investigations previous or ongoing by the banking regulator. Don Kramer did not return a call seeking request for comment.

Some of the bank’s management often talked about Bell’s relationship to Bush-appointed Attorney General John Ashcroft—an appointment pushed through with a strong show of support from Herbster, according to former Republican strategist Karl Rove—as a possible influence to what some saw as a lax stance on the part of the OTS, say sources. Bell even handed out brochures to bank staff to join an organization that supported Ashcroft’s political career, we were told in interviews for this story.

“Don Bell and Carl Herbster regularly boasted of their close connections with the Bush administration,” says Matthew Mabe, a Security Savings investor and friend of Bell’s.

Hiding the truth

The bank seemed to avoid appearing any further on OTS radar screens until 2007, when Dave Kjellerson became the bank’s credit officer and long-time banker and CPA John Kopecky joined as CFO.

When Kopecky joined in May 2007, he was saddled with a bleeding balance sheet. Securities Savings’ second quarter losses that year were $1.3 million.

It was at that time that the bank’s accounting department turned up irregularities regarding how receivables were being handled, how real estate-owned and bank foreclosure transactions were being treated on the bank’s books, and how markdowns on collateralized mortgage obligations backed by faulty mortgages were not being addressed appropriately under GAAP accounting rules.

Kramer, still with the OTS, again received emails from senior bank officers stating that the thrift “needs to focus on selling bad assets—not making more commercial loans,” according to copies of emails sent to the OTS and shared with The Implode-o-Meter, and warned that identified write-downs on the bank’s books would adversely impact capital levels. Further losses at the bank, and the inability to distribute income from the sale of nearly $100 million from one of the bank’s markets (Garden City, Kansas) created a need to remove CEO Gilmore and chief operating officer Eric Valaika from the bank. It was at this time that Bell moved Olathe’s Mayor Mike Copeland into the CEO position.

As the Herbster loans soured on Security Savings’ books, Bell also allegedly convinced a friend, Matthew Mabe, that the church land would be a good investment, and had him sign personally on a loan for $16 million—with another bank—to buy it. Mabe has apparently now sued Bell and recently learned that the proceeds of the loan were paying off a problem loan at Security Savings, citing a breach of contract for promises Bell made in that investment in return for a strong co-signature.

In the spring of 2008, new CEO and city mayor Copeland admitted to his board that the bank was somewhere on the OTS’ radar screen. Copeland further told his board of directors that the OTS had six months earlier issued a letter directing the bank to maintain a total risk-based capital level of 11.50 percent, compared to the standard 10 percent regulatory requirement.

According to call reports filed by Security Savings, the bank barely surpassed that directive for the fourth quarter of 2007, reporting only an 11.51 percent risk-based capital level.

Then-CFO Kopecky warned that until problem assets were cleaned up, they’d need to book yet another operating loss, and his interim solution to maintain that appropriate regulatory capital level was to shrink the bank.

Executives present during the board meeting told The Implode-o-Meter, “Bell fumed and vehemently opposed shrinking his banks assets.” A respected board member, Ray Pritchett, who’d worked for the FDIC for a number of years prior to serving on Security Savings’ board, walked out of the meeting and apparently resigned when he learned that the former CEO Gilmore had waited months to inform the board of the prior OTS directive.

A few weeks later, as the bank neared their June 30th year-end call reporting period and fiscal year end, Kopecky was suddenly fired. According to internal emails and memos obtained by The Implode-o-Meter, the OTS’ Kramer had again been previously warned of further potential risks in accounting ahead of Kopecky’s surprise departure. Staff inside Security Savings told The Implode-o-Meter that when Bell learned Kopecky had called the OTS’ Frank Haugh for advice on how to mark to market a troubled $4 million CMO backed with no-doc Alt A paper, Bell had allegedly decided to let him go.

Officials at Security Savings refused to comment on why Copeland or Bell fired Kopecky. Sources also have suggested that the OTS went dark, and didn’t respond to Kopecky’s warnings both before or after he was let go.

Hitting the numbers

The bank, now in need of a CFO to sign off on regulatory reports, brought back its former COO Eric Valaika, following an alleged prayer session that Valaika allegedly had led with Bell.

“With all the whistleblower reports the OTS got from the bank’s management and directorship over the past five years, I always assumed Bell’s Republican and local government connections kept their regulator at bay.”—Security Savings investor, on condition of anonymity.

Fear was mounting, too, as Security Savings CEO Copeland realized the bank would not make the 11.5 percent risk-based capital mandate, which could trigger an immediate action by the OTS. According to internal emails obtained by The Implode-o-Meter from both Copeland and Valaika to their chief credit officer Kjellerson, it was suggested that the bank re-book commercial loans as housing development projects—placing them in the 1-4 family residential bucket on the financials, instead of keeping them in the asset class they were originated in.

The move had clear implications for regulatory capital weightings.

“You have to carry twice as much capital for a commercial loan compared to home loans when calculating total risked-based capital,” said a CEO at another Kansas bank, who asked to remain anonymous. “It sounds like they were trying to manipulate the risk weighting classifications, which would positively impact key capital ratios on the call report they must file with OTS.”

The bank’s chief credit officer Kjellerson resigned in July, and according to internal emails, he was outraged when his then-CFO Valaika scolded him for going to their outside public auditor, Maher Hoffman & McCann, about how the commercial loans should be booked.

Local newspapers reported that the bank lost $2.4 million for that second quarter of 2008.

Newly former CFO Kopecky, who was also no longer with the bank but knew the losses should be higher, made the move to alert the outside auditor about things he had seen, after regulators at the OTS had remained silent concerning his warnings of alleged manipulation of the bank’s financials.

This fall, sources familiar with Security Savings’ operations said the outside auditor finally took action and forced the bank to file an amended call report. CFO Valaika was apparently displaced—his second firing from the bank—and now works in another Kansas bank. No newspaper reports or bank press releases were issued about the change in their financial condition, but according to research by The Implode-o-Meter, regulatory fillings now show the second quarter loss has been increased to $3.4 million.

“Changing a call report should be a big red flag to signal an immediate inspection by the OTS.”—current OTS consultant, on condition of anonymity.

Despite what should have been an obvious red flag of an amended call report, the OTS still did not initiate an investigation, and sources say it could be because while the risk capital change was obvious and below the 11.5 percent directive, the bank is still technically considered ‘well capitalized.’

According to a review of both the original and amended call reports by The Implode-o-Meter, Security Savings’ revised risk-based capital fell nearly 40 basis points in the amended report, from 11.33 percent to 10.92 percent.

“Still, changing a call report should be a big red flag to signal an immediate inspection by the OTS,” said a current OTS consultant who works for another Kansas bank, under condition of anonymity.

“With all the whistleblower reports the OTS got from the bank’s management and directorship over the past five years, I always assumed Bell’s Republican and local government connections kept their regulator at bay,” said a bank investor and former confidant of Bell’s. Only the OTS would know that for sure.

Since then, shareholders have been informed by letter that the bank has applied for government bail-out funds; the OTS doesn’t appear to have signed off on giving TARP money to Security Savings. According to SNL Financial reports, however, what their regulator did do was allow them to participate in the FDIC debt guarantee program, meaning they can borrow from other banks and the FDIC will guarantee their subordinated debt. Questions are now mounting—if the OTS issues a cease and desist order, will they be able to pay off short term borrowings, or did the OTS just stick the FDIC with the bill?

Until the OTS shuts down the bank, sources say its executives will try to sell the bank. Those sources who are familiar with its asset valuation think a buyer shouldn’t pay over one times book value and said the OTS is issuing a cease and desist order. When asked about this, Mike Copeland denied receiving the cease and desist order yet, and the regulatory directive has not been published on the OTS website. Unfortunately, there is always a lag time between when such a directive is issued and the public actually finds out about it. As is implied by repeated demonstration since the banking crisis began, financial regulators like the OTS likely do this because they don’t want to cause a run on the bank or other adverse reactions if they can instead sell it through backdoor negotiations.

Copeland, however, denies actively trying to sell the bank.

”We understand that the OTS feels the need to discipline in private the poor risk management practices of the savings banks it supervises,” said Martin Eakes, head of the Center for Responsible Lending. “However, the OTS’s lack of any public response to the repeated claims and evidence of malfeasance at Security Savings serves to undermine the public’s confidence in the banking system as a whole.”

In late February Housingwire.com broke news that, the OTS had begun a full safety and soundness exam at Security Savings. But CEO Copeland (and his press man) denied the review was serious or that a regulatory compliance examination was occurring. However, The Implode-o-Meter has learned, from sources working with the OTS on the banks examination, that a full inspection has been underway.

But it’s been years since the OTS has conducted this level of detailed review. Given the bank’s lack of earnings, its loss of numerous bank officers and seasoned executives over the past few years, its now-weak management team, and its shaky investments in risky loans and other questionable investments, it will be interesting to finally see what response is forthcoming from the OTS regarding the bank’s future. The bank’s call reports filed with their regulator shows the bank lost another $4.5 million for the 1st quarter of 2009, and sources familiar with the bank’s accounting worry that assets are still not marked correctly.

In the meantime, U.S. taxpayers are only left to speculate how many other community institutions like Security Savings really are out there, flying under the low-level radar of the OTS. As bank regulators everywhere are showing an apparently unimpressive track record in dealing with the concerns over the safety and soundness of the U.S. banking system in recent years, in this case, the warning signs appear to have been ringing loudly and consistently — and as clear as a bell.

Teri Buhl is an investigative journalist covering Wall Street who has written for the New York Post Sunday Business, Trader Monthly, The Implode-o-Meter, HousingWire, and Dealbreaker.com.

Addendum: Mike Copeland’s claims on the blogosphere about not being interviewed or given adequate chance to respond to the ‘allegations regarding the banking business of his customers or about legal, regulatory or personnel matters’ are not true. Both Copeland and Donald Bell did not return numerous phones calls before I broke the first story on the Bank’s recent OTS review at HousingWire.com – After they saw the printed story Copeland called back, was interviewed, and asked to respond to documented emails and letters about bank regulatory problems reported to the SEC. The Bank was asked again to comment before this story was printed.  The Bank’s general comments are included in this story, along with their comments I published at HousingWire via a story link.

Multiple former C-level bank executives, accounts, lawyers, and consultants for the OTS were also interviewed for this story and granted anonymous sourcing for fear of continued retribution by the bank.

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