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Smaller is Better

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  • | 8:34 p.m. September 10, 2009
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Few banks on the Gulf Coast showed a profit so far this year. But small community banks make up a disproportionate share of those that made money in the second quarter.

Smaller works.

When it comes to making money on the Gulf Coast, smaller banks outnumbered their larger rivals, according to the Review's analysis of the latest data from the Federal Deposit Insurance Corp. (See accompanying charts in this issue).

Still, profits were hard to come by. Of the 81 banks headquartered on the Gulf Coast, just 15 were profitable in the second quarter. Of those profitable banks, about two-thirds had assets below $300 million.

Small, profitable banks had these qualities in common: They didn't chase risky loans during the boom despite the temptations, they kept their overhead low and they carved out niches in communities by lending to creditworthy borrowers they knew well.

For the most part, commercial real estate and construction loans are the bread and butter of community banking in Florida. So it's no secret that as commercial real estate goes, so goes banking.

Collectively, the 81 banks headquartered on the Gulf Coast lost $183 million in the second quarter, down from the $22 million they lost in the second quarter of 2008. This is despite the fact that total assets grew nearly 7% to $34.8 billion in that one-year period.

Some of the largest and most profitable banks during the boom reported losses in the second quarter. These included Synovus Bank in St. Petersburg, Orion Bank in Naples, IronStone Bank in Fort Myers, TIB Bank in Naples and
Florida Community Bank in Immokalee.

Investors have little to show so far in 2009. Just 17 banks showed positive return on equity as of June 30. That's nearly half as many as showed a positive return on equity in June 2008.

While some bankers see signs of a recovery, most bankers agree that it will take some time to work through the bad loans sitting on many books. Regulators have become more aggressive, forcing some acquisitions and closing other banks. Most agree the consolidation is just beginning.

Small smiles
Surprisingly, some of the small, still-profitable banks do business in areas such as Charlotte and Lee counties that have been hit especially hard by the real estate downturn.

“I wish I could tell you it was a magic wand,” says Craig DeYoung, president of Charlotte State Bank in Port Charlotte. He says the bank avoided sub-prime residential loans, condominiums and acquisition and development loans.

“We never did participate in the huge loans that can impact the bottom line,” DeYoung says. “Our average loan was smaller than a lot of our competitors.”

Chief executives of smaller banks say they know their borrowers better than larger competitors. “We banked our friends rather than picked up with the product du jour,” says William Valenti, president and chief executive officer of Florida Gulf Bank in Fort Myers.

Valenti acknowledges that rivals made more money during the boom. “During the heyday we would look around at our many people were making so much money,” he recalls. But the bank stuck to a strategy of conservative loans and hired bankers who held the same philosophy, a strategy that's paying off today.

Often, bankers are pushed by an aggressive board of directors that may be composed of people in other industries who don't appreciate the risks in banking. “Your directors drive a lot of that,” says Geoffrey Roepstorff, chief executive officer of Edison National Bank in Fort Myers.

Roepstorff says directors of his bank backed his conservative lending criteria because they knew that rivals who touted return on assets greater than 1% were taking on more risk. “You can't be here for the long term by doing that,” Roepstorff says.

In many cases, smaller community banks don't have the overhead of a fast-growing larger bank. “We try not to put a bank on every corner,” says Roepstorff, whose bank has just three branches. Instead, it's more efficient to use courier and Internet services.

For some profitable banks, geography makes a difference. Sanibel and Captiva islands' economies haven't suffered as much as mainland Fort Myers because tourism there has held up relatively well. “I don't think we have anywhere near the distress situation that's taking place over the bridge,” says Craig Albert, president of Sanibel Captiva Community Bank. “We had a real good July and August,” he says.

One advantage that small banks have is speed to deal with problem loans before borrowers fall further behind. “When something starts going sideways, we can grab the file and get working on it right away,” says Albert.

Profits in some cases didn't come from lending. Some banks sold assets. At The Palm Bank in Tampa, President and Chief Executive Officer Chris Anderson says the bank sold securities and booked a $1 million profit. Without that, the bank would have reported a small loss for the second quarter.

And the profits at small banks that made money were down substantially in the second quarter when compared with the same quarter a year ago. For example, Charlotte State's profits fell 93% in that timeframe. “We could show a loss at some point,” says DeYoung. “I don't see a rosy 2010.”

Of course, being a small bank didn't guarantee profits. Plenty of small banks on the Gulf Coast got into trouble with bad real estate loans.

For example, in the second quarter, The Royal Palm Bank of Florida in Naples lost $31.7 million, the biggest decline in net income of any bank on the Gulf Coast in dollar terms. The bank has $154 million in assets and is under a “cease and desist” regulatory enforcement action.

Royal Palm President Greg Murphy couldn't be reached, but he said in an earlier interview with the Review that the bank has a special team devoted to clearing bad loans made by previous management. The bank set aside $10.7 million for loan losses in the second quarter, FDIC data shows.

At Partners Bank in Naples, which posted the worst return on equity of any bank on the Gulf Coast, the deterioration of land values derailed plans by Orlando-based Semoran Financial to buy the bank this summer. Partners, which is now under a “cease and desist” order from banking regulators, needs to raise $7 million or more by Sept. 30, says Robert Sudbrook, president of Partners, a veteran banker who was summoned out of retirement to raise new capital and reorganize the bank two years ago. The bank has $69 million in assets.

Big challenges
Larger banks that were very profitable during the boom suffered losses in the most recent quarter. Naples-based Orion Bank, the Gulf Coast's second-largest bank and once one of the country's most profitable, swung to a loss of nearly $11 million in the second quarter.

Orion Chairman, Chief Executive Officer and President Jerry Williams couldn't be reached, but the bank has aggressively pursued defaulting borrowers after regulators urged it to do so in an enforcement action. Orion has set aside $41.8 million in allowances for loan losses as of June 30 and its assets have declined 7.6% to under $2.7 billion in the one-year period ending June 30.

Synovus Bank says its net loss of $15.2 million reflects costs associated with the acquisition of First Florida Bank of Naples in April 2008. Synovus President David Dunbar says the bank's focus is to “move the non-performers” — loans that are in default — to allow for growth in the first quarter of next year. The bank's assets have shrunk by 15% to nearly $1.5 billion in the year ending June 30.

IronStone Bank in Fort Myers attributed its $7 million second-quarter loss to construction loans that went bad in Southwest Florida and Atlanta. The bank, a subsidiary of First Citizens BancShares in Raleigh, N.C., lends in 12 states. Its asset growth has stalled at just under $2.7 billion. “We intentionally reduced our exposure to construction lending in Southwest Florida and Atlanta,” says Barbara Thompson, manager of corporate communications for the bank.

By contrast, just two large banks — Raymond James Bank in St. Petersburg and USAmeribank in Largo —generated 89% of the meager bank profits on the Gulf Coast.

And Republic Bank in Port Richey surged to the top of profitability ratios of return on equity and return on assets. It's not clear what strategy Republic has employed to reach those high rankings; officials there couldn't be reached.

However, Bloomberg News reported that parent company Republic Bancorp was cited by federal regulators earlier this year for charging high interest rates for loans on tax refunds. The company's stock has been the best performing among U.S. bank stocks for two years.

Officials with Raymond James Bank couldn't be reached, but in an interview in October 2008, Raymond James Bank President and Chief Executive Office Steve Raney said the bank adhered to strict loan underwriting. In 2008, the bank converted from a thrift that primarily made residential loans to a commercial bank. It also has a rich source of deposits from its brokerage clients, whose cash gets swept into the bank.

USAmeribank benefited from the fact that it opened in February 2007 and avoided making bad real estate loans. The bank's president, Joe Chillura, says the real estate loans the bank has made have been to small- and medium-sized businesses that occupy the buildings they own. These include doctors, lawyers, accountants and other similar highly paid professionals who are good credits.

Chillura says the bank has been able to grow deposits while rivals are distracted by bad loans. “If you can't grow your deposit base in an independent-bank environment, you're done,” he says.

Tampa Bay Editor Alex Walsh contributed to this article.

The Outlook

For bankers on the Gulf Coast, commercial real estate is their biggest worry even as they start seeing signs of a recovery.

That's because commercial real estate is at the heart of most bank portfolios in Florida and the sector is experiencing rising vacancies and falling rents. “With unemployment rising and businesses closing down, rentals get more difficult,” says David Hall, president of Southwest Florida Community Bancorp in Fort Myers.

Commercial real estate usually lags residential sales, but despite a rebound in home sales, bankers haven't seen a similar effect in commercial real estate. “It'll be challenging on the commercial side,” says Craig DeYoung, president of Charlotte State Bank in Port Charlotte.

“Where is the stimulus money?” wonders Bill West, president of the Bank of Tampa. He says there's been little evidence of it reaching Tampa. He says 2010 will look much like 2009, but prospects are brighter in 18 months.

“Overall, we've seen signs of a recovery, but we have not yet seen it in Southwest Florida,” says Barbara Thompson, manager of corporate communications for IronStone Bank in Fort Myers. The bank lends in 12 other states.

“It'll be like the '90s,” says William Valenti, president and chief executive officer of Florida Gulf Bank in Fort Myers, referring to the last commercial real estate downturn. “It'll be a struggle to get through this stuff.”

Still, there are signs that point to a recovery. Existing-home sales have rebounded and prices have stabilized. Hall thinks the tourism season will bring more buyers. “Last year they were here, but they didn't spend any money because they were looking at a very severe recession,” he says.

The decline in population may not be as severe as previously expected. In Lee County, Hall says the number of students returning this year will not show the large decrease that some feared. Hall is also the chairman of the finance committee of the Lee County School District.

David Dunbar, president of Synovus Bank in St. Petersburg, believes the third quarter will be dismal before hitting bottom in the fourth quarter. “Aside from real estate, everyone's doing better,” he says.


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