New Kingdom

REVIEW SUMMARY:
Company. Mutual of Omaha Bank
Industry. Banking
Key. Size matters.

Kevin Hale keeps coming back to Marco Island.

The veteran Florida banker started his career on the island community at the tip of Collier County when he became president of a small lender there at age 27.

Thirty years later, he's back on the island. This time, Hale is director of community banking for Mutual of Omaha Bank, a $4.1-billion asset bank that's a subsidiary of insurance giant Mutual of Omaha.

Under his direction, the Nebraska-based bank acquired Marco Community Bank after it failed on Feb. 19. It's the first acquisition of what is likely to be a string of buyouts that Hale says could eventually vault Mutual of Omaha Bank to the $1 billion-asset level in Florida.

Despite its problems, Marco Community Bank reflects the kind of institution Hale is seeking. It had a dominant presence in the market it operates and its single branch had $117 million in local deposits. As for its sour loans, the Federal Deposit Insurance Corp. agreed to share in future losses.

Like other investors scooping up failed banks today, Mutual of Omaha saw opportunity when it formed a bank in January 2007. It joins other out-of-state financial institutions expanding in Florida, including North Carolina-based BB&T and Louisiana-based IberiaBank.

Mutual of Omaha and its healthy competitors believe population growth will resume and Florida's prime position as a retirement destination and tourism Mecca will continue as the economy recovers and the Baby Boomers retire.

“We think the economy will rebound here perhaps faster than other parts of the country,” Hale says.

Insurance customers
Mutual of Omaha already has lots of customers in Florida. The 100-year-old insurance company has 150,000 policyholders in Florida. The company sells insurance that appeals to retirees, such as life insurance and Medicare supplemental insurance and long-term-care policies.

“We like to be in markets with policyholders,” Hale says.

Besides making loans to existing customers, Hale says the bank offers other services such as wealth management and trust services. “Our interest is not just in making the loans,” Hale says.

But Mutual of Omaha's strategy differs from some of its insurance competitors. For one thing, its agents won't be selling certificates of deposit or car loans. That will be the domain of bankers such as Hale and John Clark, Naples market president.

And it isn't importing bank managers from other states. Hale was president and chief operating officer of Naples-based First National Bankshares when Fifth Third Bank acquired it for the peak price of $1.6 billion in 2005, or 6.5 times tangible book value. At the time, First National had $5.3 billion in assets, $3.9 billion in deposits and 77 branches stretching from the Tampa Bay area and Orlando to Sarasota, Fort Myers and Naples.

“We've been in this market a long time and there's an advantage in that people know us,” says Hale, whose two-year non-compete agreement with Fifth Third Bank has now expired.

In Naples, for example, the new Mutual of Omaha Bank branch there attracted $8 million in deposits in its first four weeks. Clark, the Naples market president, is a former retail-bank executive with Barnett Bank and Orion Bank. Most recently, Clark was Southwest Florida president of American Momentum Bank.

Because of the economic slowdown, about 60% of the loans the bank will be making initially will come from the residential side, Hale estimates. In particular, Hale says there's very little competition making jumbo loans, which the bank keeps on its books rather than sell in the secondary market. “We believe it's a great earning asset,” Hale says.
Businesses continue to struggle on the Gulf Coast.

“I don't think this was a particularly good season,” Hale says, referring to the tourism and seasonal population influx at this time of year. Still, Hale says there are opportunities for making commercial loans. “There are plenty of businesses that are successful and profitable right now,” Hale says. “We've been very busy with credit requests.”

Florida expansion
Hale is scouting opportunities to grow Mutual of Omaha Bank in Fort Myers, Sarasota, the Tampa Bay region, Orlando, Palm Beach and Jacksonville. Miami is not in the plans because customers there require a certain international expertise that the bank doesn't have.

Mutual of Omaha Bank plans to open a branch in Tampa on April 15. Initially, Hale envisions opening two branches in Tampa, one in St. Petersburg and another in Clearwater. He reasons four branches are enough to serve that region because they will be complemented by Internet banking.

The bank's preferred method of expansion is to acquire institutions rather than build its own around Florida. “Size is not a determining factor,” Hale says. Mutual of Omaha Bank is interested in acquiring banks with up to $5 billion in assets, he deadpans. That's every bank headquartered in the state of Florida.

“We look at 10 to 12 opportunities a week,” Hale says. Except for Marco Community Bank, Mutual of Omaha Bank hasn't bid on any other Florida bank in the FDIC auction process.

Hale says he looks for banks with “something left to sell.” For example, banks with a strong base of local depositors would be attractive. Hale calls those “real customers.” Many banks gathered deposits through brokers from around the country, and those depositors have no loyalty to any bank.

With Internet banking, Hale says the bank can reduce the number of branches and lower overhead expense if it acquires a multi-branch bank. “You can consolidate and close branches,” he says. The FDIC-assisted deals smooth the process. “You're able to purchase market share at attractive prices,” Hale says.

Consider the Marco Community Bank acquisition. Despite its troubled loans and its relatively small size, it still commanded 16% deposit market share on the wealthy island, second to Fifth Third Bank, according to FDIC data as of June 30. Mutual of Omaha paid a 1.5% premium to acquire Marco's deposits.

And as has been customary in government-assisted deals, the FDIC and Mutual of Omaha Bank entered into a loss-share agreement on nearly $105 million in Marco loans.
Hale says finding good bankers isn't a problem these days. And most of the problems at struggling banks stem from poor management. “Usually the core group is great,” says Clark.

Rapid profitability
Mutual of Omaha Bank achieved profitability after two years, much faster than the three to five years it takes most banks to reach that level. The bank, which was formed in January 2007, reported net income of $5.3 million in 2009.

Hale attributes the bank's profitability to the fact that it grew quickly with the acquisition at auction of failed First National Bank in Reno, Nev., and its affiliate in Newport Beach, Calif. That gave Mutual of Omaha Bank $3 billion in deposits, while the FDIC retained most of the loans.

Indeed, the bank's profitability improved as it put that money to work. In 2009, Mutual of Omaha Bank's interest income grew 90% to $177.2 million while its interest expense rose 9% to $47.3 million compared with 2008. The bank's net interest margin grew to 3.9% in 2009 compared with 1.76% in 2008. “We got the critical mass fast,” Hale says.

Bad loans were negligible, which allows bank officers to make new loans instead of managing troubled ones. “That's played a big role,” Hale says.

Hale says size is one advantage the bank has over smaller community bank rivals in Florida, especially those that have started up in the downturn. In particular, Hale says it's hard to maintain high overhead on a small capital base for very long without growing loans quickly. That's a challenge in a slow economy such as this one. “You've got to make a profit,” Hale says.