Fiscal Pain Shared By Walter Quinn, Heartland Bank

Little Rock’s Heartland Bank avoided major fallout from overzealous real estate lending by operating with a different business model. More than five years down the road from the bursting real estate bubble, Heartland and its largest shareholder were battered by loans related to another sector: oil and gas.

Both Heartland and Walter Quinn, lead shareholder in the $227 million-asset bank, drew regulatory concerns in the management of problem loans.

During an examination last year, questions were raised about Quinn’s involvement with a reworking of off-book problem loans mixed with new loans.

At the end of a complicated series of transactions, the bank was no better or worse. However, Quinn’s financial position was improved when the bank could have benefited.

Just as Heartland Bank was contending with issues of asset quality and risk management, so too was Quinn in his own business dealings. Were his personal financial issues interfering with his fiduciary duties?

Quinn didn’t want to talk about the specifics of transactions involving Chris Robertson, now a 6.7 percent stakeholder in Heartland, but did regarding his efforts to help the bank deal with problem loans.

“We did improve the bank by taking some loans out of the bank,” Quinn said. “I can’t speak for the regulators, but I would think they would view that as a positive.”

Last year, Quinn stepped down as a bank director and as chairman, president and CEO of Heartland’s parent company, Rock Bancshares Inc.

“I’m on a leave of absence,” he said. “I’m just dealing with my personal investments. My interest is getting Rock Bancshares and Heartland back on track. I’m doing what I can to help at the bank and working on some of my business situations.”

Those situations include a $4.9 million consent judgment in November against Quinn and a string of his ventures tied to his loan default with Prosperity Bank of El Campo, Texas.

That was followed this year by a $585,000 default judgment against him on a corporate jet loan held by Bear State Bank of Little Rock and a lender-mandated for-sale sign on his $5.7 million vacation home in Colorado.

Quinn declined to elaborate on where things stand in efforts to restore order to his financial world. But the 54-year-old Little Rock businessman is open to talking about where the bank has been and where it is going.

“We want to get back to normalcy, and I don’t see why we can’t do that,” he said.

Quinn was in the forefront of new ownership that used a stronger mix of higher yielding commercial loans to transform what was an underperforming, publicly traded thrift in 2004 into a profitable, privately held niche bank.

“Commercial lending, not real estate lending, that was the foundation of the bank and where we wanted to take it,” said Quinn, the man most identified with Heartland Bank. “We were doing a really nice job on that until we had some exposure on the energy side.”

Investors enjoyed a “three times return on their money over a 10-year period,” by his reckoning.

“That’s something I’m proud of,” Quinn said. “I don’t know whenever we’ll be able to get back to that. It depends on how circumstances play out in the next months.”

His fortunes and those of Heartland Bank avoided a severe battering from real estate, but they shared in a beat-down linked to plummeting oil and gas prices.

Quinn and the bank both felt the sting of West Texas Intermediate Crude plummeting from more than $100 a barrel during 2014 to below $30 in mid-January.

“At the end of the day, it’s all about generating the cash flow to support the loan,” Quinn said. “The [regulatory] guidance of that changed after we already had a portfolio” of oil and gas loans.

During a 24-month swing, Heartland Bank posted its biggest annual profit ever and recorded its smallest annual profit since 1999.

Net income of $7.4 million in 2014 plunged to $234,000 in 2015, with oil and gas loans as a prime variable.

Rock Bancshares is two months into a $3 million private placement stock offering to raise capital to support Heartland Bank.

“This isn’t the first time we raised capital,” Quinn said. “The situation is more the deciding factor in that.”

While past efforts raised money to fund growth, this time the purpose is to replenish capital gashed by loan charge-offs.

The bank boosted its capital from $27 million to $33 million heading into 2015 as the buildup of nonaccrual loans gained momentum.

The first-quarter tally of $3.6 million increased to $4.8 million in the second before jumping to $17.1 million in the third quarter and nearly doubling to $34 million at year-end.

Six months later, nonaccrual loans declined to $29.1 million after more than $5.8 million was charged off. Nearly a tenth of its commercial and industrial loan portfolio was zeroed out, 6.2 percent of Heartland’s overall loan portfolio.

Once the life of the dividend party, oil and gas loans were becoming fiscal buzzkills.

Maintaining its capital base while diversifying its loan portfolio and working through problem loans is the order of the day at Heartland.

“That’s the plan,” Quinn said. “We know what’s required, and we know what we need to do. I’d compare Heartland to a lot of banks that went through the real estate crisis of 2008-10.

“We didn’t have the real estate exposure. But part of where we were expanding our loan portfolio is in the energy sector, and that sector is where the real estate market was in 2008-10.”

In 2013, Rock Bancshares raised $10 million through the sale of capital notes.

The holding company followed that in January 2014 with the purchase of its Little Rock office building at 1 Information Way for $7.1 million from Quinn’s Rock Financial Group LLC.

In turn, Rock Bancshares transferred ownership of the 54,772-SF multi-tenant office building to the bank. The four-story project on the Arkansas River houses a Heartland bank branch.

At one time, Quinn’s stake in Rock Bancshares was as much as 75 percent.

“Over the course of years, I’ve sold some additional interest,” Quinn said.

His ownership position stood at 52.3 percent at year-end 2014, at 48.38 percent at year-end 2015 and less than 45 percent most recently.

Joining Quinn as a leading shareholder in Rock Bancshares these days is Craig Benson of Austin, Texas, 17.2 percent.

Last year, Benson stepped into the position held by Dr. Mark van Overbeek of Incline Village, Nevada, who previously held a 17.3 percent stake in the holding company.

Benson also replaced Overbeek as a Rock Bancshares director after he resigned on June 12 from the holding company and as chairman of Heartland Bank.

Judy Lawton, Heartland’s chief operating officer, was named president of the bank and the holding company as part of the board reshuffling.

Heartland Highlights

Total Assets: $227.1 million    Dividends: $500,000     Loans: $180 million    Net Income: $530,000
Tier One Equity Capital: $25.7 million    Full-Service Locations: 5*     Staff: 40
(As of June 30)

*Little Rock, 2; and one each in Bryant, Fordyce and Sheridan.

All dollars in thousands.
Source: Federal Deposit Insurance Corp.