Banking 2009

By Lori Johnston March 31, 2009

Charles Conoley can only laugh when he’s asked to describe the challenges facing the region’s banking industry.

The obstacles are numerous and the sense of success is drastically different than a few years ago, as he’s watched competitors shut down and others struggle with the threat of failure. Conoley’s nine-year-old Horizon Bank has been one of the region’s top performers in uncertain times, with more than $600,000 in earnings in 2008.

“We were the only profitable community bank in Manatee and Sarasota counties last year,” says Conoley, president and CEO of the Bradenton-based bank.

Horizon Bank has been “lucky,” he says, with a portfolio lighter in construction lending compared to its competitors, which saw massive spikes in nonperforming loans last year. “We didn’t grow as fast as peer banks,” Conoley says. “We were focused on making money and controlling costs.”

For some banks, the results have worsened each quarter. First quarter 2009 earnings reports set to come out this month are likely to reveal more woes among the region’s institutions, again altering the local industry’s future. Banks also are awaiting word of TARP (Troubled Asset Relief Program) funds as part of the $700 billion bailout for much-needed capital. Industry experts and some bankers agree: Several local banks will fail this year, and it’s looking more and more likely that no new banks will open.

“There are a lot of challenges. We have had several failed banks in our marketplace and [yet there are still] a lot of opportunities for growth. But for us to continue to grow, we’re going to have to build our capital,” says Conoley, whose bank is among those that have applied for TARP dollars. “Capital will be a challenge.”

In order to survive, banks need to focus on safety, soundness, profitability and growth, in that order, in the next several years, banking expert Tramm Hudson advises.

“We are going to have to frankly re-establish trust and confidence in the banking system, but from the depositors’ viewpoint as well as for borrowers,” he says. “Trust and confidence are the key things that will help restore the banks because depositers, I tell you, are so scared in terms of where they place their money, their life savings.”

Community banking

William Isaac, a former FDIC chairman who lives in Sarasota, says newer community banks that aren’t as burdened by toxic loans and have “adequate capital and adequate liquidity” have the most to gain in this gloomy climate since they can win the qualified customers out there who are looking for money and credit. Basically, they can have their pick of loans and will be free to develop new business.

More mature banks with higher percentages of nonperforming loans are taking a more cautious approach, pulling back on credit and tightening standards, because they have to put aside a reserve against a potential loss on loans that haven’t been paid on for 90 days.

Problem loans also are expensive in terms of management time and the “demoralizing” scenario bankers face when they have to call customers daily to get their loans repaid, Hudson says.

Shaun Merriman, president and CEO of Gateway Bank, which opened last year, is happy not to be in that demoralizing situation. “We have a pristine balance sheet,” he says. The bank had $38 million in total loans, with zero nonperforming, and a net 2008 loss of $2.28 million. The reason, he says, is that Gateway focused on small- to medium-sized businesses that kept it out of problematic real estate lending.

Still, young banks can get into trouble. One potential pitfall Merriman sees is a mountain of loan requests from borrowers whose loans were not renewed or moved out of other area banks, making it crucial to be cautious in underwriting.

“You could get bit by a loan,” he says.

Banks must become more vigilant with their credit, reminds Hudson, by reserving it for only their best customers, and of course, not being overly concentrated in real estate.

Like Gateway, Horizon Bank has and continues to focus more on lending to small- and mid-sized businesses, as well as what Conoley describes as low-dollar rental houses, duplexes and small commercial buildings. It’s been involved as well with the USDA Rural Development Lending program, which he says was helpful in providing consistent business in Florida, southern Georgia and Alabama.

Horizon also structured its large amount of nonperforming loans—$7.37 million as of fourth quarter 2008—in a way that saved them from taking a large amount of losses.

“We still look for a down payment,” says Conoley. “We still want to have people with a good credit history and income or cash flow sufficient to make the payments. A lot of our lending brethren in the area kind of got away from some of those criteria.”

Landmark Bank also saw its nonperforming loans shoot up to $6.4 million, according to fourth quarter 2008 data. The bank grew its loan portfolio by $37 million that year and saw $728,000 in 2008 losses. “Our loan losses are there, but luckily they are lower than the regional averages,” president and CEO Tom Quale says. “Our bank continues to be conservatively managed and well capitalized. Because of those two factors we were still able to take on new loan relationships. Many of our competitors have significantly slowed their lending activity or shut it off.”

Insignia Bank, which completed its second year in 2008 and opened its third office earlier this year, was the highest capitalized bank to ever start up in Sarasota. It also suffered some loss with $3.1 million in nonperforming loans and a 2008 net loss of $2.6 million. Chairman and CEO Charlie Brown says the “slice of the pie” for loans is smaller than it used to be, but sectors that continue to perform well include medical and anything involved with maintenance and repair, which includes machinery equipment sales and electronic equipment.

We expect people will continue to drive what they have a little longer or continue to use what they have a little longer,” he says.

New money

So what about launching a brand-new bank with a squeaky clean balance sheet? Is this the year?

Probably not.

The enormous amount of capital that start-ups raised the past five years or so isn’t likely to happen again anytime soon, banking experts say. There was a period of time in the early 2000s where it was very easy for a bank to be able to get start-up capital through the sale of shares in a bank in organization. Lots of people wanted to be able to be in on these types of investments. Now that a few local community banks that have been closed, such as First Priority Bank and Freedom Bank, investors have less interest.

And regulators have tightened the standards, putting start-ups under the microscope. It’s taking much longer—more than a year—for regulatory agencies to grant a charter. For those reasons, as well as higher capital requirements and the increased competition for deposits among existing banks, a bank being organized now will have a very difficult time.

For example, Consumer First Bank N.A., which is in organization, is trying to time itself to come in at the low end of the cycle with a pristine balance sheet, says Anthony N. Leo, proposed chairman and CEO. But the bank suspended its public offering in February, when it was expecting to raise $18 million to $23 million, due to a more difficult regulatory environment.

“Those that came in at the top of the cycle were the first ones to close their doors,” he says. “We will be set up and ready to go when the economy turns around. It’s debatable. Is that going to be later this year? Is that going to be early 2010? Well, I don’t know.”

Unsteady future

These troubles have shown that the old way of building a bank—using retiree dollars to fund the loan portfolio—may not be appropriate any longer, Hudson says. Banks now are focused on asset preservation—making sure loans are well secured and that customers can repay in good and bad times—and protecting credit quality. “The fastest way they can fail is frankly reaching for earnings in this difficult economy and taking unwarranted risk,” Hudson says. “I don’t think anyone’s expecting huge returns. I think what the investors and banks are expecting is preserve my capital, preserve my position. Don’t be reckless.”

Fifth Third Bank’s South Florida region is following that advice, looking more closely at credit history, the timely payment of credit and the history of usage of available credit lines, as well as verification of income documentation instead of stated income, says Tim Mackay, senior vice president/retail executive for Fifth Third Bank-South Florida.

The bank will expand to 19 financial centers in the Sarasota-Manatee market through its takeover of failed Bradenton-based Freedom Bank, which had about 6,500 customers. “That gives us access to that many more customers,” he says. “We want to be there for our customers and hold their hands and help them through this economic cycle. Our focus clearly is on helping our customers and helping them get through this. It’s not defining our success necessarily in terms of pure dollar numbers.”

But until residential construction strengthens, Gateway’s Merriman says growth will be slow among the region’s banking institutions, partly because so many businesses, from restaurants to appliance companies to architect firms, are linked to the housing market.

Nationwide and in this area, some experts expect to see a continued decrease in the number of banks. But that’s not necessarily a bad thing, says Conoley of Horizon Bank.  “We still have too many banks in Bradenton and Sarasota,” he says. “We have a huge amount of competition in the marketplace.”

And Isaac, the former FDIC chairman, who likes to look farther out, says banks stand to profit when the markets settle. Even now, he says, perceptions of banks are changing after the downfall of Lehman Brothers, the sales of Bear Stearns and Merrill Lynch, and local and national Ponzi-type scandals.

“I think a lot of people are coming to believe that the banking system is the safest place for their money. In years past, in the go-go days, a lot of people thought, ‘Well, who needs to do business with a bank? I can get a better deal with this adviser or this investment firm,’” he says. “I think people are beginning to realize that there can be some real risk when you get away from the banking system.”


More bank failures;

Few if any banks will start up this year.

Banks will play it safe and conservative.

Newer banks will be in the best position to make loans.

Strong loan categories will be quality small and mid-sized businesses, small commercial/residential, medical and maintenance/repair.

Consumers eventually will head back to banks since there's no safer place for their money.

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