Doug Hile is no seat filler.
The new president and chief executive of the family-owned KleinBank in Big Lake, Minn., is the first outsider at the helm since the bank opened a century ago, stepping in because the next generation of Kleins is still too young to take over.
But in only two months on the job at the $1.6 billion-asset bank, Hile already has a deal to buy a struggling one-branch competitor and expects more to come. The goal: assets topping $2 billion within five years.
"It is likely going to be done in small steps like this, but the opportunities are increasing so we might have the chance to speed that up," he said.
Indeed, as the industry's outlook starts to improve, more companies could start eyeing similar deals.
"We are going to see a lot more of these acquisitions, as the downturn begins to level off," said Anita Gentle Newcomb, the president and managing director of A.G. Newcomb & Co., a bank consulting firm in Columbia, Md. "They are so small that the buyer feels like they can get their arms around the problems pretty quickly. You get to buy something inexpensively that isn't going to suck up a lot of time and resources. For that strategic reason, it is a good time to be buying if you can."
Hile said KleinBank would consider buying failed banks in the Minneapolis-St. Paul area from the Federal Deposit Insurance Corp. or striking other deals like the one it did for the $62 million-asset Community Bank Plymouth, in Plymouth, Minn. (The price was not disclosed, but Hile described the terms as "attractive.")
Unlike some recent deals for struggling banks, where buyers shunned bad loans, KleinBank agreed to take on all of Community's assets.
Hile said KleinBank — which has 22 branches concentrated mostly in the western Minneapolis-St. Paul metro area — would gain one branch in a suburb where it would like to be, after the deal closes in the fourth quarter.
"There are gaps that we have in our footprint and we are looking at ways of filling those," he said. "We are going to look at anything that gives us the opportunity to beef up our presence on the growth corridors."
Community, which is nine years old, has lost money for the past six quarters, according to FDIC data. By June 30, its total risk-based capital ratio had shrunk to 7.58%, which is considered undercapitalized, and its noncurrent loans, mostly in construction and development, made up 3.56% of total loans.
Observers said KleinBank's heft and healthy capital levels minimize the deal's risk. It had a total risk-based capital ratio of 12.34%, the FDIC data showed.
Still, its nonperformers are also climbing. At June 30, 4.35% of its loans were not current, up from 2.31% a year earlier. Hile said the bank has created a special assets division to work through those loans, which are in construction and development and commercial real estate.
KleinBank has managed to remain profitable, earning $1.3 million in the second quarter, down 75% from a year earlier.
"They appear to be a good bank that is doing a good job," said Jerry Swords, the president of Swords Associates Inc., a bank consulting firm in Kansas City, Mo. "They have excellent margins."
Hile said KleinBank could afford to buy other struggling banks, though it plans to be cautious.
"We feel comfortable with this one and we would like to do others," he said. "But we wouldn't do anything that would put our company at risk."
Swords said deals like the one for Community are more helpful to the seller than the buyer, but still have some benefit over acquisitions from the FDIC.
"The best deals are those that are struck by two willing businessmen. If you can do a regular acquisition you are better off," he said. "As a buyer, you are better informed as to what is going on there, rather than learning it very quickly through the closure process."
Swords said some community appreciation also can result. "It buys them a lot of goodwill with the customers and the employees. They look good because they saved a bank from failure."
Even so, Hile said KleinBank would not rule out government-assisted transactions. "Striking deals with the FDIC is the most logical way to make acquisitions until the economy firms up."
KleinBank resulted from the combination of nine community banks that the Klein family began acquiring in 1907 when C.H. Klein bought First National Bank of Chaska.
In 2005, the company merged the charters into one to cut administrative and regulatory costs, streamline operations and retain its independence, according to Daniel G. Klein, who ceded the president and CEO titles to Hile in July. Klein remains president, CEO and chairman of the bank's parent company, Klein Financial Inc. He said that three younger Kleins also work at the bank, but that it will be a while before they can take charge.
Besides focusing on a growth strategy, Hile said he is looking for ways to make KleinBank more efficient and to better position it to compete against larger banks.
Hile joined KleinBank from Meridian Bank in Phoenix, where he served as its president. Meridian is a unit of Marquette Financial Cos., another family owned bank company.
