Capitol Federal Savings Buys Capital City Bank

Capitol Federal Financial, the parent company of Capitol Federal Savings, has agreed to buy Capital City Bancshares, Inc., the parent company of Capital City Bank, Topeka.

The two companies say they have signed a definitive agreement and plan of merger pursuant to which Capital City Bank will merge into Capitol Federal. 

They are calling it a merger, but this arrangement looks more like an acquisition by Capitol Federal. Capitol Federal has agreed to buy Capital City for $37.5 million in stock. Capitol Federal Financial stock (CFFN) was down 1.2% to $12.48 per share on the news this morning, but recovered to $12.60 by mid morning.

As of March 31, 2018, the combined company would have total assets of $9.5 billion, loans of $7.5 billion, deposits of $5.7 billion and an equity position of approximately $1.4 billion.

With the acquisition of Capital City Bank, Capitol Federal Savings will enter the commercial banking business, through the origination of commercial lending products and offering of commercial deposit services, for the first time in its 125 year history.  

While Capitol Federal Savings has built a small, but meaningful, portfolio of mostly commercial real estate loan participations through its network of correspondent banks over the course of the last five years (which portfolio totaled approximately $462 million in gross loans as of March 31, 2018), this merger with Capital City will enable the company to offer a full array of commercial lending and deposit products and services.  With the talented and experienced commercial banking teams from Capital City Bank joining Capitol Federal Savings, the Company will be able to introduce these lines of banking into its branches in overlapping communities upon closing of the merger, while working to expand to the other communities served by Capitol Federal.

John B. Dicus, Chairman and President of Capitol Federal, stated: "We are pleased to be merging with Capital City Bank to introduce a full commercial banking experience to our customer base and communities.  Capital City Bank has a long history of building a conservative, customer focused community bank, with an overlapping geographic focus in markets highly familiar to us - Topeka, Lawrence and the Overland Park market of Kansas City.  Through the leadership of the Sabatini family, Capital City Bank has built a well-regarded company over the course of many decades, driven by the people and platforms we need to enter the commercial banking business in the right way and in a meaningful way.  Through the many years of knowing the team at Capital City Bank, it is obvious to us that we hold a shared cultural approach to banking, focused on risk management and customer service.  In addition, we are able to complete this merger and remain under $10 billion in assets, allowing us to continue our current dividend policy of paying 100% of earnings, while providing a positive upside."

Dicus said: "We are excited that Bob Kobbeman, Capital City Bank's President and Chief Executive Officer, will be joining Capitol Federal Savings to run this new commercial banking division for our Company.  After growing our commercial real estate portfolio over the last 5 years through our correspondent lending network, we believe this is the right time to enter the commercial banking business through this low risk merger."

Capital City Bank generated $2.45 million in earnings in 2017. Capital City Bancshares, the holding company for the bank, generated $1.4 million in earnings in 2017, according bank filings with the FDIC.

Capital City Bank, a commercial bank holding company with $434.1 million in total assets as of March 31, 2018, has locations in Topeka, Lawrence and Overland Park.  Capital City Bank offers commercial, personal, trust, and brokerage products and services.  Like Capitol Federal Savings, Capital City Bank adheres to a business model that prioritizes customer service and conservative lending.  Established in 1892 in Richland, Kan., and relocated to Topeka in 1964, Capital City Bank has a strong history of community support through charitable, educational and non-profit donations.  These characteristics, among others, make Capital City a great fit with Capitol Federal.

Matt Sabatini, Chairman of the Board of Capital City Bank, said: "Our ownership and senior management team are truly excited about the opportunity going forward, as we join Capitol Federal.  With their size, branch network and strong capital position, the merger offers our team a wonderful chance to grow our commercial banking business.  Because Capitol Federal Savings does not currently have a full suite of commercial banking operations, we will be able to provide a significant portion of our people a role in the combined organization.  As a family-run bank for over 126 years this factor was of great importance to Frank Sabatini and our family."

Subject to the terms of the merger agreement, Capital City Bank stockholders will receive 3.725 shares of Capitol Federal's common stock for each of the outstanding shares of their common stock. Based on this fixed exchange ratio, Capitol Federal will issue approximately 3.0 million shares of its common stock, representing approximately 2.1% of pro forma shares following the merger.  Based on Capitol Federal's closing price of $12.64 as of April 27, 2018, this represents a value of $47.08 per CCB common share, and an aggregate deal value of $37.5 million.  This equates to a price to CCB tangible book value as of March 31, 2018 of 141% and a premium to CCB's core deposits of 3.2% as of March 31, 2018.

How SCL Health Removed $251 Million From St. Francis Health Center in Topeka

By Michael Hooper

SCL Health strategically depleted $251 million in reserves from Saint Francis Health Center in Topeka before selling the operation in 2017 to University of Kansas Health System and Ardent Health for a $1.00.

A Form 990 tax return filed for Saint Francis Health Center in 2016 shows the removal of $251 million in assets that had been listed as inter-company receivables the year before.

The explanation for -$251 million is listed in schedule O of the Form 990 at the very bottom, it says, "Transfer of SFT accountable health network net expenses -$114,710 Equity transfer - Refunding of Kansas 2012 bond issue -$32,467,007 Equity transfer - Refunding of Kansas 2010 bond issue -$163,662,319 Equity transfer - Marian Clinic -$649,000 Equity transfer - Unrecognized service cost in pension plan -$14,670,430 Equity transfer - Interest expense in excess of interest income -$21,023,283 Equity transfer - Fund unrecoverable costs of fixed assets -$20,558,442 -Transfer of Medcare assets from SCLHS -$1,334,702."

My math says that adds up to -$254.4 million in "equity transfers." That pretty much wipes out the $251 million in intercompany receivables on the tax return the previous year. How convenient these numbers are nearly the same.

I'm trying to uncover the mystery behind the the two bond issues that add up to a $196 million.

The St. Francis balance sheet on the 2015 tax return lists no bond indebtedness, indeed only $19 million in liabilities. And total assets that year were $368 million, including $251 million inter-company receivables, and virtually no debt. Then in the 2016, the tax return says St. Francis has to pay all these debts? 

I asked Neil Dobler, a St. Francis board member, about the $196 million bond issues. He said he does not remember that much money going to St Francis from those bond issues. He recalls some improvements including a renovation of the Saint Francis Emergency Room, he recalls capital spending around $20 million, but SCL Health capital spending wasn't there in final three years of ownership of St. Francis.

Around the time of those 2010 and 2012 bond issues, SCL Health was acquiring control of three hospitals in Colorado. SCL Health System agreed to pay $275 million to Community First Foundation for full control of three Exempla hospitals, The Denver Post Reported.

SCL Health is the professional management corporation that took over management of the Sisters of Charity of Leavenworth assets.  Around this time SCL Health was also looking to exit Kansas. Around 2011 some changes were made in the system and management company moved the headquarters from Lenexa to Broomfield, Colorado.

SCL Health had actually considered closing the Topeka hospital, but local advocates worked to save the organization. A year ago, hundreds of people rallied in favor of saving the hospital.

Saint Francis Health Center was for over a hundred years a successful hospital that generated a modest profit because of frugal management and high professionalism. The sisters were very particular about their Devotion to the mission of taking care of the sick. The nun CEO was a very important role in the management of the hospitals over the years, but such nuns became scarce. Who wants to take a vow of poverty and do the work of a CEO who normally gets paid hundreds of thousands of dollars? Sister Loretto Marie Colwell was one of the last great nun CEOs. When she left St. Francis in the early 2000s the hospital had over $200 million in reserves, some of that generated by donations in Kansas.

I asked Nikki Sloup, spokeswoman for SCL Health, why did St. Francis issue $163 million in bonds in 2010 and $32 million in 2012? Where did you spend the money? Was the money spent in Topeka?

"I believe you previously discussed this in detail with contacts from SCL Health and our organization had in-depth conversations with the Attorney General, who declared satisfaction with the disposition of these funds. I don't have any additional insights I can offer beyond what's already been shared."

I did look at this issue a year ago. Here is one article about the loss of St. Francis reserves. The difference today is that we have the 2016 tax return proving SCL Health took $251 million from St. Francis in "equity transfers."

I asked the Kansas Attorney General about the depletion of $251 million.

Jennifer Montgomery, spokeswoman for the AG, said "I received your messages. Additional information about the questions you raise can be found in documents posted on our website at the following link:  http://ag.ks.gov/docs/default-source/documents/stfrancis-ag-schmidt-letter.pdf?sfvrsn=58eed41a_4 and here:

http://ag.ks.gov/docs/default-source/documents/exhibit-b---hinkle-law-firm-assessment.pdf?sfvrsn=3edd41a_4.

In the Attorney General Derek Schmidt letter, he writes, 

"We are aware of a separate but related question that has arisen in community discussion, including comments filed with our office. Some have noted that as recently as 2015, St. Francis' financial statements showed roughly $250 million in an account receivable from SCL, a fact that has led some to question "What happened to those funds?" We need not, and do not, definitively answer that question here. However, because of the community interest in this question, we provide the following information that appears to offer an explanation. First, based upon information available to us at this time, it appears that because of the legal structure of the relationship between SCL and SFH - a structure established by numerous 7 decisions made years ago - SCL (the parent entity) had authority to use those funds for the broader purposes of the SCL system, not solely for the purposes of SFH."

"Three of those past decisions are particularly notable. In 1993, the Articles of Incorporation for SFH were amended to eliminate a requirement that SFH exist solely for the operation of a hospital in Topeka. In 1997, SFH and SCL entered into a Restricted Affiliate Agreement that gave extensive control over SFH finances to the parent entity. And in 2004, SFH again amended its Articles of Incorporation to make express that SFH operates to carry out the broader charitable purposes of SCL."

"Those decisions, which gave SCL almost complete authority over SFH and its finances, were made many years before the proposed transaction and, in any event, are long beyond any statute of limitations. A copy of a timeline explaining the reorganization of SFH is attached hereto at Exhibit E. Second, despite the legal relationship described above that gave SCL broad latitude to use funds generated by SFH, it nevertheless appears the vast majority of those accounts receivable were in fact used for purposes benefiting SFH. Our inquiry revealed the following: As a result of routine transfers of funds over time from St. Francis Health Center, Inc. ("SFH") to the Sisters of Charity of Leavenworth Health System, Inc. ("SCL), as expressly permitted by the Master Trust Indenture and related Restricted Affiliate Agreement, SFH had accumulated an intercompany receivable from SCL in the amount of approximately $249 million as of December 31, 2015. Following the decision by SCL's Board of Directors on May 26, 2016, to either sell or close SFH due to the hospital's continuing losses, SCL opted to use the accumulated assets associated with SFH to effectively "clean up" SFH' s books by defeasing bonds issued for the benefit of SFH and paying off other SFH intercompany obligations. The bond defeasances included a $163. 7 million defeasance in connection with a 2010 Kansas bond, and a $32.5 million defeasance in connection with three Colorado bonds that had been used in identifiable part for SFH asset purchases (since Colorado is a multi-state issuer). In addition, SCL used $20.6 million to fund previously unrecognized pension costs associated with SFH employees, $14.7 million to fund unrecovered costs for information technology assets, $21 million to fund system-wide interest expenses in excess of interest income, and another $700,000 to fund other non-profit entities in the SCL network, for a total of $252.5 million, an amount that accounts for all of the $249 million in 2015 accounts receivable. "

Accounting Tricks

SCL used accounting tricks to swindle $251 million from St. Francis. Those reserves were generated here and belong here. Maybe legally, SCL Heath got ahold of the funds, but morally those funds belong in Kansas.

Sisters of Charity of Leavenworth Started in Kansas, made a huge impact on the world from Kansas, but now their assets are no longer here. Kansas got taken.

I believe the Kansas Attorney General still could make a case for $196 million that belongs in Kansas in a charitable foundation. That money could be used for indigent care, mental health services, drug and alcohol treatment and other health care initiatives needed in Kansas, where there is simply not enough money for health care.

The future

Neil Dobler said the new owners are doing a good job with the hospital.

Despite all the struggles over the past year, the hospital didn't lose too many staff. New people have been hired.

Dobler said the hospital staff are very dedicated and continue to provide excellent care to patients. "It's definitely headed in the right direction," he said.

Insurance Company Stock Loses 60% of Value While CEO Jack Brier Earns Quarter Million Annually

By Michael Hooper

One of the great challenges for investors is trying to find a legitimate startup company that is going to make it big.

Topeka has a history of multiple startups that have done well -- but many companies struggle and fail. Some of these businesses go to the public for capital.

Jack Brier, a former Kansas Secretary of State, has led several public offerings of stock in his company, US Alliance Corp. of Topeka. 

Investors have sunk $22 million into his company, but the book value of US Alliance has fallen to $13.9 million, financial statements show. US Alliance is a holding company for US Alliance Life & Security Co., which sells insurance products like group life insurance and pre-need funeral expense policies.  The company’s administrative offices are at 4123 S.W. Gage Center Drive, Topeka. Former Kansas Gov. William Graves is a director of US Alliance. There are about four employees in the Topeka office. Brier responds to questions about his business practices in this article.

A review of the financial statements of US Alliance Corp., founded by Brier in 2009, shows a company losing more than $1 million per year. Meanwhile Brier, chairman, president and CEO, has been earning a quarter million in income from the business annually.

Brier was Secretary of State in Kansas from 1978 to 1987.

Brier asked Kansas shareholders to pay $5 and $6 per share for stock in US Alliance, while he was able to acquire shares as an insider for 20 cents apiece. The 2017 audit of the company shows the stock worth $1.91 in book value on Dec. 31, 2017. Insurance companies typically trade around book value, which is assets minus liabilities.

US Alliance has never turned a profit since its formation in 2009. The company lost $1.05 million in 2017, lost $1.2 million in 2016, and lost $1.7 million loss in 2015.

There are about 3380 shareholders of US Alliance Corporation stock, two thirds of them are from Kansas.

In 2016, Jack Brier earned $200,000, a $57,000 bonus plus another $28,000 compensation for a total of $285,974.

The company wants to raise more money through the sale of stock.

Investors who bought stock in this company in the last six or seven years have seen their shares lose more than 60% of their book value. Meanwhile the US Stock Market has tripled in value since 2009.

Brier acquired 414,800 shares at 20 cents per share. Early organizers and insiders acquired 1.2 million shares at 20 cents apiece when the company was founded in 2009. The first policy was sold in 2013.

During the first four years, the company raised money, often attracting small mom and pop investors around Kansas.

In 2017, the company acquired policies from American Life & Security plus bought another company Northern Plains Capital Corporation and its subsidiary, Dakota Capital Life Insurance. US Alliance paid $1.85 million for $8 million in assets from American Life & Security policies in Wyoming and South Dakota, Brier said. The company used $3 million in stock to buy Northern Plains Capital.

When asked why the company’s shares have lost 60% of their book value, Brier said, “that is the price of increasing the assets of the company from $19 million to $38 million.

“We doubled the assets of the company, but our operating expenses increased just 17%,” Brier said in a phone interview.

I asked him how he justifies paying himself $285,000? And he said he sees the the glass half full, deflecting my question.

“We told shareholders this is a not a get rich quick opportunity,” he said. He complained about low interest rates earning little on capital invested in bonds. Management does not want to take on too much risk. The company is building its revenue and income, he said.

It appears the winner in this US Alliance business is Brier, not the shareholders.

“It’s been a great set up for Jack Brier, but unfortunately he’s burned a lot of investors along the way,” said David Tangeman, a Houston accountant who reviewed the financial statements of US Alliance.

The company’s web site has charts showing how the company has increased its customers and premium income, it sounds like everything is great, the company plans to sell more shares, but its web site doesn’t talk about the loss in book value.

I respect Brier for taking my call about his business, but I think his priorities are skewed in his favor. He talked about his admiration of Warren Buffett, CEO and chairman of Berkshire Hathaway. Brier’s company has bought reinsurance from Berkshire Hathaway’s General Re and also has hired a Berkshire Hathaway subsidiary to handle management of US Alliance’s bond portfolio.

The major difference between Buffett and Brier -- and there are many differences -- is that Buffett took no more than $100K salary from his company while focusing on building up shareholder value. In the early stages of a company, it is common for CEOs to be frugal and pay themselves very little -- a living wage -- rather than a quarter million. The book value of Berkshire Hathaway has increased in value about 20% annually, while Brier’s company has declined in book value by 60% and Brier’s company has never turned a profit.

Investors beware.

The author is a stockholder of Berkshire Hathaway.