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Business Observer Friday, Jun. 17, 2016 2 years ago

Survivor's story

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Bank of Commerce has a unique tale — so far — in recession survival. Will it have a happy ending?
by: Mark Gordon Managing Editor

Executive Summary
Company. Bank of Commerce Industry. Banking Key. Bank seeks to overcome myriad challenges.


Longtime Sarasota community banker Charlie Murphy, in one sense, could be doing cartwheels in the street for one simple, yet significant metric: Bank of Commerce, the institution he founded in 2000, remains open — the lone survivor from eight other community banks founded in the Sarasota-Manatee market from 1998 to 2000.

“I'm like the old patriarch of community bankers,” says Murphy, 67, an executive with a bank in the region since 1985, when he was named president and CEO of Sun Bank of Sarasota. “I'm having a lot more fun today than six or seven years ago.”

While times are better, Murphy realizes a full-on celebration is premature. Profits, for starters, have been scarce. The bank made $393,000 in 2012, but lost nearly $10 million in 2011 and from 2013-2015. Run out of a three-story building in downtown Sarasota, just off Main Street, the bank has multiple other obstacles to overcome. The list includes:

Capital levels: The bank has operated under a consent order from the Federal Deposit Insurance Corp. and the Florida Office of Financial Regulation since March 28, 2011 to raise capital levels. Bank of Commerce, according to the order, had 60 days to raise its Tier 1 capital level to at least 8% and its total risk-based capital level to at least 12%. But through March 31, according to FDIC data, the bank had a Tier 1 capital level of 3.83%, or $5.83 million, and a total risk-based capital of 7.01%.

OFR officials declined to comment on the specifics of the Bank of Commerce order or why the bank hasn't been sanctioned for non-compliance, citing confidentiality rules. It's unusual, but not unheard of, for a bank to remain open after failing to meet a capital order, says industry analyst Ben Bishop, with Jacksonville-based Allen C. Ewing & Co. “The regulators' attitude post-recession is black and white from what it was,” says Bishop. “During the downturn they were tough and shut down probably some more banks than they should of. Now they tend to give survivors some more latitude to work it out.”

Nonperforming assets: The bank had $13.7 million in nonperforming assets through December, according to FDIC data. That's down from a recession-era peak of $29.7 million, in 2010, the result of selling off 60 real estate properties in the last six years. But a hefty figure lingers. “We have some fairly large pieces out there,” says Murphy.

Bank of Commerce's ratio of nonperforming assets to total assets through March 31 is 6.7% — sixth worst among all Florida community banks, according to Pensacola-based financial data firm Saltmarsh Cleveland & Gund. The average ratio of nonperforming assets to total assets among community banks statewide is 1.12%, adds Saltmarsh in its most recent Florida Asset Quality Report. SaltMarsh has four offices in Florida, including one in Tampa.

Shrinking board: The bank's board, an important source of business for community banks, has lost five members. Three resigned, and two died. Four board members remain, including Murphy. The others are Bank of Commerce CFO David Dillon; real estate developer and philanthropist Cathy Layton; and Lakewood Ranch-based homebuilder John Cannon.

Bank officials have chatted with prospective new board members for years, with no takers. “It's challenging to find someone who wants to be part of a community bank in this situation,” says Layton.

One final, yet notable, constraint to growth and sustainable survival comes from roughly $15 million in trust preferred stock debt the bank holds. Trust preferred stock, sometimes called Trups, is when a bank creates a trust to hold an asset, sometimes in the early days of the bank, and then sells it, usually in a bond. That kind of debt, say several bank industry
analysts, can be a big barrier for a community bank seeking fresh capital.

“That's an albatross around his neck,” says Bishop, who knows Murphy, but doesn't regularly follow the bank. “The only way to get out of that is to get someone with a lot of capital to pay it off and pay back shareholders.”

Even with all those obstacles and more, several area bankers are impressed Bank of Commerce, with $211.2 million in assets through March 31, carries on. “They are still swimming upstream a bit,” says Jody Hudgins, a prominent area banker now with Naples-based First Florida Integrity Bank. “But the fact that they are still open and haven't gotten any other regulatory orders is a story of how well Charlie and his team and the board have done.”
Adds Hudgins: “They may be the smartest bankers in Florida.”

'Limited supply'
If not the smartest, maybe some of the savviest. Hudgins says Bank of Commerce was one of the first community banks to stop lending when the bubble showed signs of burst. Murphy credits that to his experience.

“During the go-go days we didn't have smart competition, we had dumb competition,” he says. “You had a limited supply of talented bankers. There were people who were CEOs of banks who had never been in a downturn.”

Another decision Murphy made before others that was savvy, if personally painful: He cut expenses. The bank slashed the payroll from 67 to 32 employees. It shuttered its 401(k) program. And it froze raises for five years. “Losses were escalating and eating into capital levels,” Murphy says. “We shrank the bank. We sold assets. We cut to the bone. We did everything we had to do to make it.”

Remaining employees faced a stark choice: Stay with what could be a failed bank or look for work at one of the larger banks with a deeper cushion. Opportunities were slim, but there were some.

Bank of Commerce Senior Vice President Jeff Burkee, who joined the bank in 2005, nearly quit. Formerly with SunTrust and Regions Bank, Burkee says losing the 401(k) and going sans raise for several years stung. A switch in roles, from loaning money to businesses to working with borrowers who couldn't pay back their loans, also stung. And the anxiety was palpable. “There were so many times when we came to work where we didn't know if we would be there the next day,” says Burkee.

But Burkee and a core group of others stayed with the bank — and Murphy. “He's a great leader to follow,” says Bank of Commerce Retail Manager Debbie Cooke, who worked with Murphy at SouthTrust Bank in the late 1990s and early 2000s. “He was always pointing out the positive.”

Burkee, 52, is back to lending money again at the bank, and he doesn't regret sticking it out. “I had calls and offers from other banks and headhunters,” he says. “But I couldn't pull the trigger. I felt like there were things we could accomplish here.”

Layton, from her perch on the board, works closely with Murphy on bank survival tactics. She considers him the best man for job. “He's been relentless,” Layton says. “He's tried the possible, the improbable and even the impossible. He is so committed to a satisfying ending.”

Plan ahead
Murphy says he never considered quitting, though the job wore on him at times. He remained visible, and positive, save for the occasional time he went into his office and closed the door. “A big part of my net worth is dedicated to this bank,” says Murphy. “I was never going to step away. I never really thought about it.”

Murphy learned, or relearned, two key management lessons from the experience. One is to always be honest and transparent, no matter the news, with employees and regulators. “We always told the truth,” he says. “We never said we are in great shape.”

A second lesson is the value of forecasting. Bank executives tried to anticipate problems in the small stage, before things blew up. “We tried to do a lot of analysis and a lot of planning,” he says. “We tried to make sure we were never caught with our pants down and something happened we didn't know about.”

On a personal level, Murphy says he did the best he could to stay positive. He went to dinner with his wife. He played golf with friends. His faith, he adds, was a big source of comfort. “You try to focus on the good things,” he says. “I have a lot of things to be thankful for.”

Complicated future
The next step for Bank of Commerce is to find outside capital and/or grow through new loans and profits. Both possibilities represent significant hurdles. That's true even in a banking climate where several community banks, from Tampa to Naples, have grown profits, raised capital or both.

The question of why hasn't Bank of Commerce been able to do it comes up often, in and out of the bank. “Not a week goes by when someone doesn't ask, 'Why can't you just make some money?'” says Layton. “But it's so much more complicated than that.”

Bank of Commerce has hired several consultants over the last five years to help raise capital, including New York-based Sandler O'Neill in 2011. That effort, to raise $8.5 million, never came to fruition. Other efforts also fizzled.

Lending is also tough when business owners can go to many other banks, particularly ones without the lurking issues. “The challenge is getting back to a regular earnings situation,” says Murphy.

Finally, there's the trending theory that a community bank must hit $1 billion in assets to succeed long term. An eternal optimist, Murphy holds no illusions Bank of Commerce will reach that level. That's OK with him. Says Murphy: “You can't be all things to all people.”


Tougher times
Nine community banks were founded in the Sarasota-Bradenton market from 1998 to 2000. Just one, Sarasota-based Bank of Commerce, remains open. Here's a look at what happened to some other community banks from that period.

SunCoast Bank: First from its group of peers to sell, when it was acquired in April 2006. Starkville, Miss-based NBC Capital Corp., which later changed its name to Cadence Bank, bought SunCoast for $34.8 million.

Coast Bank: St. Louis-based First Banks bought Bradenton-based Coast for $22.1 million in August 2007. Coast had $60 million in bad loans when it was sold, and it also faced several class-action lawsuits. A former executive was sentenced to more than a year in federal prison in 2011 for a $1 million loan scheme. First Banks sold the former Coast Bank portfolio in March 2012.

Flagship National Bank: Lake City-based First Federal Bank of Florida acquired the assets of Bradenton-based Flagship after regulators shuttered it in October 2009. Plant City-based Sunshine Bank bought two former Flagship branches from First Federal in July 2015.

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