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Business Observer Thursday, Jan. 15, 2009 11 years ago

Capital Idea

Capital is a precious commodity these days. Here's how four banks on the Gulf Coast have raised capital this year to strengthen their financial positions.
by: Jean Gruss Contributing Writer

Banks are built on trust and there's no better evidence of a healthy bank than a strong capital position to cushion the blow of an economic downturn.

The challenge now is that every bank is seeking fresh capital to make sure it can weather a recession that some say may last another two years. Executives with four Gulf Coast-based banks explain how they've raised millions of dollars despite intense competition for capital.

These banks have turned to private investors as well as the government for scarce capital. In many cases, they've had to offer sweeter deals to entice skittish investors to part with their money for what is likely to be an extended slump.

The four range from larger, statewide Bank of Florida to small community bank Commerce Bank of Southwest Florida. They also include a bank now being formed — First National Bank of the Gulf Coast — to one formed in 2000,
LandMark Bank.

Commerce Bank
of Southwest Florida

Mark Morris saw the looming banking crisis coming and quickly realized this wasn't an ordinary downturn. “We started seeing the softness a year ago,” he says. “Capital and liquidity are kings.”

Morris, president and chief executive officer of Commerce Bank of Southwest Florida in Fort Myers, started working the phones to existing shareholders this summer to strengthen its capital position.

Some of the bank's residential loans in Lee County were troubled and Morris knew that regulators would demand the bank raise capital to offset any losses. Commerce Bank couldn't resell the loans as usual because the secondary market collapsed.

“This is as tough as I've ever seen it,” says Morris, a longtime banker. “I was on the telephone for the better part of a month.”

The bank offered shares at half-price and raised $1.1 million from many of its 220 shareholders. Directors on the board bought half the shares. “The board needed to show resolve,” Morris says.

Morris himself liquidated his self-directed individual retirement account to purchase Commerce Bank stock. “It'll pay off for me down the road,” he says.

Then, Morris raised another $1.8 million in preferred nonvoting shares from Capitol Bancorp, a Michigan-based community bank company whose executives had helped form Commerce Bank in 2005. The shares pay an 8% dividend and can be converted to common stock after five years. Morris says Capitol Bancorp also lent Commerce Bank an undisclosed sum.

In addition to raising money from investors, Morris cut overhead and shrank the bank's assets. Commerce Bank had 23 employees in June and it now operates with 11. He also shrank the bank's assets from nearly $83 million as of March 31 to $70 million now by terminating some loans, strengthening the bank's equity by $880,000. “We're shrinking the bank,” he says.

Finally, Commerce Bank has applied for $1.8 million from the federal government's capital-purchase program. Considering the cost of capital in the private market, the government's demand for a 5% dividend is attractive, Morris says. The government's ownership stake may even improve relations with regulators. “They need to think as owners,” Morris says.

LandMark Bank
Thomas Quale, the president and chief executive officer of LandMark Bank in Sarasota, was planning a $7 million private stock offering when the federal government announced its capital-purchase program in the fall.

But the private offering's potential cost and the dilution to current shareholders were unattractive. By contrast, the federal program is relatively inexpensive. It calls for issuing nonvoting preferred shares that pay a 5% dividend for the first five years and reset to 9% after year five. The government will also receive warrants to buy common stock based on the price at issuance.

LandMark applied for $8.6 million from the government and has suspended its private offering, though it already has raised an undisclosed sum. “Everything's on hold until I receive approval for the government program” Quale says.

In an odd twist, applying for government help is seen as a good thing. “The public understands this is aimed at healthy banks,” Quale says. “We hope to have it off our books within five years,” he says.

But even if the government approves the LandMark investment, Quale may still continue the private offering at a reduced level. “There's a lot of anxiety out there and having enough [capital] is absolutely critical right now,” he says.

First National Bank of the Gulf Coast
Gary Tice and Garrett Richter built First National Bankshares of Florida into a 77-branch, $5.3-billion bank and sold it in 2005 to Fifth Third Bank for $1.6 billion. At the time, Fifth Third paid 6.5 times tangible book value to gain a foothold in the once-sizzling Florida market. Now, most banks barely trade at book.

Despite the downturn, Tice and Richter decided to build another bank this year called First National Bank of the Gulf Coast. Banking on their successful track record, they hoped to raise between $50 million and $60 million. So far, they've raised $37.4 million, short of expectations but nonetheless a spectacular achievement given the billions of dollars of losses in the financial markets and the poor conditions for most banks.

“We had a reputation we could leverage,” Richter says. “We talked about the fact that it's a great time to start a new bank; we will have no bad loans on our balance sheet.”

By fall, Tice and Richter had raised $33 million. But the financial markets became so distressed that the founders of the bank offered to return money to investors.

“Things changed and they didn't have the extra cash to invest,” Tice says. However, only a handful of investors wanted out, amounting to $2 million. “That was really encouraging to us,” Tice says.

As the financial crisis grew more severe, the bank's founders decided to sweeten the offer. Every shareholder will now get a warrant for five more shares at the $10 initial public offering price. The warrants don't expire for five years.

“Our objective, quite frankly, was to get open,” says Tice, who has targeted January for the opening of the bank.

Bank of Florida

Bank of Florida needs capital to continue to grow, but as a publicly traded company there aren't many options. “The capital markets, as you can see, are frozen,” says Michael McMullan, Bank of Florida's president and chief executive officer.

So when the federal government announced its capital-purchase program, Bank of Florida applied for the maximum $40 million for which it is eligible. McMullan says it could use the proceeds to make more loans and make bank acquisitions. “We grew our loans last quarter at a 20% annual rate,” McMullan says.

McMullan says the decision to apply for the government funds wasn't difficult, even though its capital position is relatively strong already. “Based on the gravity of the challenges in our economy, and in talking to regulators and their concerns, it was easy to apply,” he says. “We look at this as a viable source of capital.”

There are strings attached, of course. The U.S. Treasury can amend the terms of the deal with banks if Congress changes the law. “The way it's written now, it's pretty open ended,” McMullan says. That's his main concern with accepting government funds and McMullan says the bank may not accept the money even if it is approved.

There are other requirements with accepting federal money, including limits on executive compensation. However, McMullan says that's not a concern now. “It does provide stability,” McMullan says of the benefits of the government program. “Regulators look at capital strength as the primary thing.”

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