Shrinking Herd, Growing Profits

Four years ago, Tom Ray counted 29 banks headquartered in the three-county region that includes Charlotte, Collier and Lee counties.

Today, there are 12.

“We've reduced the herd to a manageable group,” says Ray, the CEO and president of Encore National Bank in Naples.

Fewer community banks based from Pasco to Collier split a growing profit pie, which translated into improved earnings for most banks in the region so far this year. Year-to-date profits through June at the 50 banks based in the region tripled to $108 million from the same period last year, according to data compiled by the Business Review.

But profitability doesn't mean Florida banking is completely healthy again. While many banks are making money with traditional lending, some achieved profitability by selling appreciated securities from their investment portfolios. Others generated fees from money management, and many simply didn't have to set aside profits to guard against future losses because they got rid of the bad loans they made.

An improving economy has helped. “I think the national economy is getting better, the momentum is there,” Ray says. “We can argue about the pace, but no one is arguing about the direction.”

While bankers say there are creditworthy customers, borrowers are extremely cautious about taking on more debt. Some banks report taking in more deposits than they can lend.

Meanwhile, government regulations threaten to strangle the nascent lending recovery. Higher capital requirements combined with burdensome compliance rules forced banks to confront whether to go it alone or sell out to a much larger competitor. The directors of Florida Gulf Bank in Fort Myers, which makes its last appearance in our tables this week, sold to IberiaBank of Louisiana for that reason.

Different roads to profitability
Some banks in the region are making money the way banks in Florida always have: making loans secured by real estate.

One such bank is USAmeribank in Largo, whose assets and deposits surged late last year after it merged with sister bank Aliant Bank of Alabama. “We feel good about where commercial real estate is and the values that our borrowers are jumping in at,” says Joseph Chillura, the CEO of USAmeribank. “There's a lot of money that has been on the sideline and it's becoming more active.”

USAmeribank is even financing a limited amount of construction and development, such as grocery stores, convenience stores and drugstores like Publix, CVS and Wawa. “It's very safe and it's very sound and it's profitable,” says Chillura.

Although Alabama isn't a high-growth state like Florida, Aliant Bank is a steady performer, Chillura says. Aliant's CEO is Harlan Parrish, a well-known banker formerly in the Fort Myers-Naples area with Colonial Bank and BB&T. “It gives us geographic diversification from a loan-portfolio standpoint,” Chillura says.

Many banks that had to set aside money to cover potential losses from bad loans last year didn't have to repeat that this year because of the market's improvement and the resolution of bad loans. That helped them swing from a net loss last year to a net profit this year because setting aside reserves for potential losses comes out of profits.

“Many of us have cleaned up our balance sheets,” says Steven Hickman, president and CEO of First National Bank of Pasco in Dade City. “Our reserves are stronger than most; we're able to bring all that to the bottom line.”

First National Bank of Pasco recently opened a loan-production office in Land O' Lakes. “There's growth opportunity there,” Hickman says. “I hired a lender who has a lot of ties and customer contacts.”

Still, Hickman says competition remains stiff. “Every bank out there wants to increase their loan portfolio,” he says. “You have to fight for every deal.”

David Feaster, president and CEO of Cornerstone Community Bank in St. Petersburg, says loan demand has picked up in the last 90 days from professionals, small businesses and a multifamily real estate deal. “We've got way too much cash,” says Feaster. “Now, having gotten special assets under control, we're really back in the market.”

At Gateway Bank of Southwest Florida, President and CEO Shaun Merriman says loans have grown 26% this year, but that growth hasn't offset the loans customers have paid off in the same period. Customers are paying off their loans but generally aren't taking on new debt. “By and large there's still a lot of concern about the general state of the economy,” Merriman says. “A lot of business owners are still reluctant to go out there.”

Fortunately, Gateway Bank has benefited from the increased value of its securities portfolio, as most other banks have. That's because the value of safe bonds like U.S. Treasuries rose as yields declined and banks have taken advantage of that to sell securities and realize gains.

While the profit margins on traditional lending remain thin and variable, banks have also expanded businesses that generate steady fee income. At Gateway Bank, for example, Merriman says the bank is growing its wealth management and mortgage brokerage operations. He points to the largest banks in the country that report as much as half of their income from such fees. “We'd like to get there at some point,” Merriman says.

Government hurdles
While many community banks are eking out a profit, the outlook is still challenging because of increased government regulations that will force community banks to set aside more capital and comply with even more regulatory paperwork.

“We're slowly pulling out of this and the amount of regulation placed upon us is monumental,” says Cornerstone's Feaster. “Congress went after Wall Street and they're hammering Main Street.”

Still, there is some hope that legislators will begin to see the harm from the unintended consequences of the draconian banking laws they've passed in recent years.

For example, banks with fewer than 2,000 shareholders are now exempt from registering their stock with the Securities and Exchange Commission, relieving them of the burden of duplicative filings they already provide to bank regulators.

“It's a great relief for those smaller players,” says Harish Mali, a research analyst with SNL Financial. Two banks on the Gulf Coast have de-registered with the SEC this year, including Florida Bank in Tampa and First National Bank of the Gulf Coast in Naples.

At Florida Bank, Executive Vice President and Chief Financial Officer Gary Ward says the bank will save $150,000 to $200,000 a year in compliance costs.

“The next most significant benefit is the freeing up of executive management's time around SEC reporting periods,” Ward says in an email response to questions. “The quarterly reporting requirements not only required a full-time resource, it also involved several hours of review by management and the board. Time that can be better spent managing our business and developing a better bank.”