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Business Observer Friday, Apr. 11, 2014 4 years ago

Open the Gate

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Stonegate Bank has been marching up the Gulf Coast acquiring banks from Naples to Tampa. It plans to double in size over the next few years.
by: Jean Gruss Contributing Writer

David Seleski chuckles when he's reminded of his five minutes of fame on NBC's “Today” show in October 2009.

The network interviewed the president and CEO of Stonegate Bank on the national TV morning show because it was acquiring the 100th failed bank during the crisis: tiny Partners Bank in Naples with $66 million in assets.

At the time, Stonegate wasn't very big, either. The Pompano Beach-based bank had $375 million in assets and was barely profitable.

But from that beachhead in Naples during the depth of the banking crisis, Seleski made some timely moves up the Gulf Coast to acquire banks in Fort Myers, Sarasota and Tampa. The latest acquisition: Florida Shores Bancorp with more than $500 million in assets, boosting its presence in Charlotte, Manatee and Sarasota counties.

Today, Stonegate has $1.7 billion in assets and is preparing to list its stock on the Nasdaq stock exchange. Stonegate stock, which traded over-the-counter as low as $6 in 2008, recently traded at more than $24 (symbol: SGBK) and even pays a small dividend to shareholders. The bank earned net income of $9.3 million in 2013, a 2.6% increase over the $9.1 million it earned in 2012.

Although it doesn't plan to issue more shares when it lists on the Nasdaq, Stonegate has used its stock as currency to make acquisitions. For example, 80% of the $46.2 million purchase price Stonegate paid the Michigan and Florida shareholders of Florida Shores was in Stonegate stock. (Read details of that deal in the Business Observer, Sept. 20.)

So far, Stonegate's stock is thinly traded. But once it starts trading on the Nasdaq exchange later this spring, there will likely be more institutional buyers of the stock and greater opportunity for shareholders to sell at favorable prices.

Look for Seleski to spend more of that stock. He says Stonegate could grow to become a $3 billion institution within the next three to five years in the bank's current coastal markets. Half of that growth will come from acquisitions, he notes.

Marching up the coast
Looking back, Seleski made prescient acquisitions on the Gulf Coast.

But in 2009, when Stonegate acquired the twin failures Partners Bank and Hillcrest Bank in Naples from the Federal Deposit Insurance Corp., the financial crisis was still raging and the outcome was unclear. Seleski says he was surprised that real estate values continued to plummet even after 2009. “From 2009 to 2011, we didn't grow at all,” he says.

But Seleski's investors believed in Florida's eventual return and had raised enough capital during the downturn to buy struggling banks. Stonegate acquired Southwest Capital Bank in Fort Myers in August 2010 and First Commercial Bank of Tampa Bay in Tampa in June 2011. The deal for Florida Shores closed in January.

The recovery that began in earnest in 2012 has benefited Stonegate's operations on the west coast. “We make money in all our offices,” Seleski says. “We've seen a dramatic turnaround in Southwest Florida.”

In fact, opportunities may be greater in areas south of Tampa. “Tampa's a more mature market,” Seleski says. “The bigger growth markets may be south of that.”

Bi-coastal growth
Seleski says he prefers to stick to the coastal markets and has no plans currently to enter inland areas such as Orlando. “We don't want to expand out of our existing footprint,” he says. “I'd rather get more scale.”

Because it's a commercial bank, Stonegate branches won't pop up on every corner. The bank relies on improvements in technology to help manage clients efficiently.

And Stonegate is sticking to traditional banking by making loans to businesses, unlike many rivals that are trying to diversify and generate more non-interest income from other businesses such as insurance. “We want to stick to that core business. We don't want to sell insurance,” Seleski says. “That keeps us out of trouble.”

Besides, values of real estate that banks use for collateral have recovered and there are more creditworthy customers. “The housing market has been tremendous,” Seleski says, who notes that loan growth has grown by double-digit percentage rates the last two years. “It's easier to lend today.”

Seleski says investors aren't concerned about Stonegate's Florida-centric strategy. “The taint of Florida is over with,” he says. “Florida is going to continue to attract more business.”

Instead, he says investors ask him about the impact of regulatory burdens and the risk that interest rates will rise. Seleski says new technology can help banks manage more efficiently so that they can devote more resources to regulatory compliance. “You need to be proactive and anticipate changes,” he says.

If interest rates rise, Seleski says the bank is well positioned because of the variable-rate loans it has been making. It also has shrunk its once-sizable bond portfolio, which would have been especially sensitive in a rising-rate environment.

While mergers and acquisitions have slowed, Seleski says Stonegate continues to look for opportunities to acquire banks in the region. Prices for banks aren't likely to exceed what Stonegate paid for Florida Shores, which was 1.34 times book value. “I don't think there are a lot of buyers,” he says.

Directors and investors in smaller community banks are weary from managing through the financial crisis and many of them are ready to sell, especially if banks can offer potential for growth with a publicly traded stock. “That was a pretty traumatic downturn,” Seleski says. “They want the stock, not the cash. They want the upside of your company.”

Still, don't count Seleski in the camp of those who proclaim the end of community banking. “You can do alright if you have a niche,” he says. “I don't subscribe to community banks are doomed.”

HOAs: A lucrative niche
When Stonegate Bank acquired Florida Shores Bancorp and its three subsidiary banks in January, it bought a lucrative niche business that Jim Kuhlman, right, has cultivated for nearly two decades.

Kuhlman, president and CEO of the Florida Shores Bank subsidiary in Venice, estimates that nearly half of the bank's $400 million in deposits at the time of the sale to Stonegate were tied to the homeowners association business.

Florida Shores banked so many condo and homeowners associations that it covered more than 100,000 homes. And here's the kicker: It didn't have to build a network of costly branches to gather those deposits.

In fact, deposits were coming in so fast that Kuhlman says he couldn't lend the money quickly enough. “I couldn't find enough good loans.”

But with Stonegate's size and greater loan limits, Kuhlman and a staff dedicated to that business have been busy training employees in Stonegate's branches on the east coast of the state on the nuances of the association business. “This is a beautiful thing for both banks,” says Kuhlman, now executive vice president and market president with Stonegate.

“We can roll that out on the east coast,” says Stonegate President and CEO David Seleski. In a discussion with analysts and investors shortly after the announcement of the Florida Shores acquisition, he pointed to the homeowners association business as a significant growth opportunity.

Kuhlman compares the homeowners association business to banking a municipality — as close to a sure thing in banking as you can get. Deposits come in like clockwork and payments on any loans are prompt because of the associations' powers to place liens on residents who don't pay their assessments. “We've had virtually no problems in 20 years,” Kuhlman says.

What's more, this source of deposits means the bank doesn't have to build branches to gather the money the way most banks do. Kuhlman estimates it would have taken 10 branches to gather the same amount of deposits that he did with four branches.

But that's not to say homeowners association banking is easy. Kuhlman has a team of part-time employees in Clearwater who process checks, a labor-intensive service the bank performs for associations and their managers in return for the business. In addition, branch employees should know how to help association customers when they visit. “You'd better be aware that the association banks with your branch and make them feel valued,” he says.

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