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Business Observer Thursday, Jun. 18, 2009 12 years ago

Glory Days REDUX

A pair of Gulf Coast Banks is rolling in good times and fast growth — shining stars amid the sour economy. But challenges loom.
by: Mark Gordon Managing Editor

A pair of Gulf Coast Banks is rolling in good times and fast growth — shining stars amid the sour economy. But challenges loom.

The last time Jim Kuhlman did the community bank thing, it took him eight years, mostly in boom times, to hit the $150 million mark in assets.

After a short retirement, Kuhlman is back in community banking, now at the helm of Venice-based Florida Shores Bank. And this time he's nearing the $150 million asset mark in 18 months — almost all of which has been during the recession.

In fact the bank, which opened in November 2007, has increased its asset base 255% from the first quarter of 2008 through the first quarter of 2009, from $34.8 million to $123.3 million. That's good enough to be the fastest growing startup bank in the state and the sixth fastest in the country in that time frame, according to Federal Deposit Insurance Corp. data.

“We are growing at a fantastic rate,” says Kuhlman, the bank's president and chief executive. “It has been way beyond our expectations.”

Kuhlman has a kindred spirit in Shaun Merriman, president and CEO of Sarasota-based Gateway Bank of Southwest Florida. Merriman's bank, which, like Florida Shores, filed its de novo application in 2007, has reached $72.2 million in assets as of March 31, according to the FDIC. It opened for business in May 2008.

“I'm not interested in growing for growth's sake,” says Merriman, but “we have exceeded expectations.”

Merriman, Kuhlman and a few other Gulf Coast bankers make up a select group these days: Bankers actually making loans and finding new customers, as opposed to dealing with non-performing assets and figuring out ways to raise capital to keep regulators at bay.

To be sure, Gateway and Florida Shores have some distinct competitive advantages. Those issues facing dozens of other banks, for one, have allowed Merriman and Kuhlman to play the white knight, leading a bank with no balance sheet blemishes. Both banks play up that fact in marketing and customer pitches.

Furthermore, the current banking environment is so unpredictable that federal regulators have essentially instituted a moratorium on startup banks, limiting new competition.

Of course, Kuhlman and Merriman know these advantages have a limited shelf life. “At some point, this recession will get figured out,” Kuhlman says. “And then all of a sudden we will have a whole new bunch of competitors.”

Lessons learned
While the chaotic banking environment has provided a window for Florida Shores to grow, it's really the bank's strategy that has been the driving force, says Kuhlman. And that strategy is derived from lessons, and mistakes, Kuhlman has made in past banking stops.

For example, it starts with a fanatic devotion to the five Cs of lending — with a hyper-focus on character before even considering capacity, capital, collateral and credit. Kuhlman has heard the horror stories from other bankers about borrowers who, once the economy got rough, showed up one day with the keys and said 'here you go.'

Kuhlman is looking to avoid that at Florida Shores. He has set up a loan committee that includes board members who follow his stay vigilant mantra. “If you don't pass the character part,” says Kuhlman, “we just don't do it.”
Florida Shores' focus has been in commercial loans for doctors' offices, owner-occupied commercial real estate complexes and condo associations. Those loans make up about 80% of the bank's portfolio, says Kuhlman.

Kuhlman recognizes the inherent risk in loaning money to small and mid-size businesses during a recession. He has tried to mitigate the risk through both his loan committees and by staying active in getting out and checking directly with borrowers.

Florida Shores' long-term strategy is shaped by another lesson Kuhlman learned: The bank is seeking to grow assets so it can go public someday, not be sold off to another bank.

Kuhlman built the Venice branch of Premier Community Bank of Florida into a $150 million institution in the late 1990s and early part of this decade through a similar strategy he's using at Florida Shores. But despite a four-times book payout, Kuhlman says selling to another bank — in this case Montgomery, Ala.,-based Colonial Bank — was the biggest mistake of his career.

The problems began soon after the merger in early 2005, when Colonial executives required Kuhlman to change his systems and processes for recruiting and retaining customers.

“Everything you built the bank on is thrown out the window,” says Kuhlman. “I had a nice big office, but I had no authority. I couldn't take care of my customers the way I did.”

Kuhlman, who served in the U.S. Marines for 21 years, including six years of active duty and 15 in the reserves, hung on at Colonial for six months. He left the bank in late 2005 when he was 48 years old and took the next 18 months as his mid-life sabbatical. The time off included some golf and a lot of fishing trips with his teenage sons, including a trip out west in an RV.

Kuhlman never lost the community banking itch, however, and he got back into the field in 2007. Only this time, he vows that Florida Shores will not be sold to a bigger bank.

Instead, the plan is to create four other separately chartered banks in the state under the Florida Shores banner, in markets including Greater Fort Myers, Orlando and the East Coast. Florida Shores Bank-Southeast in Pompano
Beach opened in late 2006 and de novo applications for Florida Shores-Gulf Coast in Fort Myers and Florida Shores-Central in Osceola were filed over the past 15 months.
When each of the Florida Shores reaches $300 million in assets — $1.5 billion in total — Kuhlman thinks the bank will be ready to go public.

Expense control
Gateway, like Florida Shores, is attempting to build a statewide network of banks through independent operations in other markets. Gateways are already operating in Daytona and Ocala.

And Merriman, like Kuhlman, is running the bank with a close eye on the loan portfolio. A board member-led committee scrutinizes any loan of more than $2 million, a byproduct of loaning money to small and mid-size businesses in a down economy. “We find ourselves having to be very diligent on loans,” Merriman says.

But while loans are one key to asset growth, Merriman has forged Gateway's strategy to be a bank that can grow in other ways besides interest on loans. For example, Merriman has set up departments for wealth management and residential mortgages — unusual moves for a bank so young.

Those two departments have five employees and are part of the reason the bank's assets per employee figure, which was $2.26 million at the end of the first quarter of 2009, is lower than many other new banks. Florida Shores, for instance, had an asset per employee figure of $4.11 million as of March 31, according to the FDIC.

But Merriman contends the investment will pay off in the long run. He envisions a day when a Gateway customer will have six to eight products with the bank, from mortgages to family accounts.

Merriman projects that Gateway, which has 32 employees, will turn a profit sometime in 2010 or 2011.

Also, much like Florida Shores, Merriman says there are internal reasons for Gateway's early success — it's not all predicated on the general banking environment.

One key is Merriman's hiring philosophy: He doesn't hire any employees with less than five years experience in their given specialty. Says Merriman: “This isn't a training ground.”

Another aspect to Merriman's strategy is controlling expenses. The son of a 30-year banker for M&I Bank, Merriman is a self-professed banking history buff and numbers geek. His daily updated binder of Gateway's financials serves as his personal reminder to constantly monitor the bank's expenses through meetings and chats with managers and department heads.

A final facet of Gateway's strategy is its quality service guarantee. While many businesses, even some banks, offer a money back guarantee on service and products, few go to the detailed lengths that Merriman does.

The bank's guarantee includes refunding customers $5 for an out of service ATM and $10 for mishaps such as a statement error, extensive wait times or lack of courtesy. The guarantees cost Merriman $30 last month, a token he says given the insights he picked up about where the bank needs to improve.

“I believe if you're going to be a best-in-class bank,” says Merriman, “you have to wrap your arms around quality service.”


Florida Shores Bank-Southwest, Venice
(Dollars in thousands)

ASSETS AND LIBILITES YTD 03/31/08 YTD 03/31/09 %change
Total assets 34,759 123,292 254.7%
Net loans and leases 23,884 70,947 197%
Loan loss allowance 303 1,076 255.1%
Total liabilities 16,736 107,068 539.7%
Equity capital 18,023 16,224 -10%
Noncurrent loans and leases 0 0 N/A
Average Assets, year-to-date 29,999 108,742 262.5%
Insider loans 681 6,922 916.4%
Tier 1 (core) risk-based capital 18,023 15,762 -12.5%

INCOME AND EXPENSES YTD 03/31/08 YTD 03/31/09 %change
Total interest income 375 1,261 236.3%
Total interest expense 86 548 537.2%
Net interest income 289 713 146.7%
Provision for loan and lease losses 75 238 217.3%
Total noninterest income 4 17 325%
Total noninterest expense 732 974 33.1%
Salaries and employee benefits 389 567 45.8%
Pre-tax net operating income -514 -482 N/A
Net operating income -514 -482 N/A

PERFORMANCE RATIOS YTD 03/31/08 YTD 03/31/09 Pt. change
Net interest margin 4.06% 2.79% 1.27%
Return on assets (ROA) -6.85% -1.74% N/A
Return on equity (ROE) -11.25% -11.46% N/A
Retained earnings to
average equity (YTD only) -11.25% -11.46% N/A
Efficiency ratio 249.83% 133.42% -116.41%
Noncurrent assets plus other
real estate owned to assets 0 0 N/A
Core capital (leverage) ratio 61.35% 14.51% -46.84%
Tier 1 risk-based capital ratio 68.23% 18.95% -49.28%
Total risk-based capital ratio 69.38% 20.20% -49.18%
Source: FDIC

Big Moves

Two of the fastest growing banks in Sarasota County are in the process of moving to new homes.

Gateway Bank of Southwest Florida is moving from its temporary headquarters in a downtown Sarasota office building into a stand-alone building at the corner of Bahia Vista Street and U.S. 41, just south of downtown. Gateway president and chief executive Shaun Merriman says the bank hopes to move into its new offices, at the corner one of the busiest intersections in town, by October.

Almost as significant as new digs for the bank, says Merriman, is that Gateway is saving what many consider to be one of the area's architectural landmarks from becoming a CVS Pharmacy.

The building, designed by local architect Jack West, was built with multiple concrete layers and is considered a prime example of what's known as the Sarasota school of architecture.

The three-story building had most recently been occupied by BB&T Bank, which left it in 2006 and sold it to a local investment partnership earlier this year for $2.5 million. When plans for the CVS fell through, Gateway executives jumped at the chance to be at the site, where they plan to lease 11,500 square feet over two floors.

Meanwhile, Florida Shores Bank in Venice is in the process of building its own headquarters, a 12,000-square-foot building just outside of downtown Venice. Florida Shores president and CEO Jim Kuhlman says the building will have enough room for the bank and some leased offices.

Florida Shores is currently operating out of a temporary trailer in the parking lot opposite the new building.


Gateway Bank of Southwest Florida
(Dollars in thousands)

Total assets 72,263
Net loans and leases 44,752
Loan loss allowance 590
Total liabilities 55,189
Equity capital 17,074
Noncurrent loans and leases 0
Average Assets, year-to-date 63,044
Insider loans 3,300
Tier 1 (core) risk-based capital 15,327

Total interest income 659
Total interest expense 218
Net interest income 441
Provision for loan and lease losses 223
Total noninterest income 49
Total noninterest expense 1,037
Salaries and employee benefits 676
Pre-tax net operating income -770
Net operating income -481

Net interest margin 3.39%
Return on assets (ROA) -3.05%
Return on equity (ROE) -11.14%
Retained earnings to average equity (YTD only) -11.14%
Efficiency ratio 221.63%
Noncurrent assets plus other real estate owned to assets 0
Core capital (leverage) ratio 26.28%
Tier 1 risk-based capital ratio 25.46%
Total risk-based capital ratio 26.45%
(Gateway didn't have data to report in the 2008 first quarter.) Source: FDIC

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