Colonial-ism

Colonial-ism

Banking by Jean Gruss | Editor/Lee-Collier

Colonial Bank is snapping up real estate as it plans to double its presence from Tampa to Naples. It aims to take market share from regional and national banks.

On a recent early November morning, Harlan Parrish boarded a small Cape Air turboprop in Fort Myers for the 40-minute flight to Tampa.

His mission: Scout 21 potential branch sites for Colonial Bank in Hernando and Pasco counties north of Tampa. By the end of the day, Parrish had put six of those locations under contract and he was headed back to Fort Myers on Cape Air in time for dinner with his wife and two children.

A similar trip to Sarasota and Bradenton is on the agenda. "I'm going to look at 22 sites tomorrow," says Parrish, the president and CEO of the bank's Southwest Florida region, from his headquarters in Bonita Springs.

Colonial Bank, a division of publicly traded Montgomery, Ala.-based Colonial BancGroup, plans to double the number of branches to more than 60 during the next five years in Southwest Florida by growing in existing markets from Naples to Tampa and entering new areas in the Tampa Bay region.

There's a lot riding on the expansion.

Rising costs for deposits, aggressive competition for loans and a slowing economy in neighboring states means Colonial Bancgroup is counting on Florida to lead the charge.

Those pressures already are starting to build. Out of the company's five-state banking operations, only Florida reported growth in net income in the most recent quarter versus the prior quarter, notes analyst Al Savastano of Janney Montgomery Scott. Colonial's banks in Alabama, Georgia and Nevada reported double-digit percentage declines and Texas reported a 5.9% drop.

Although it's headquartered in Alabama, Florida accounts for 56% of Colonial's $22 billion in assets and 59% of its $16 billion in deposits. Based on deposit market-share statistics compiled by SNL Financial, Colonial appears to be stealing market share from larger regional banks such as Wachovia, Bank of America and SunTrust.

Besides building branches, Colonial plans to boost revenues from fee-based services, such as managing money for clients and selling them insurance. It's also working hard to gather deposits such as ordinary checking accounts on which they don't have to pay interest.

"There's a lot of upside and opportunity," Parrish says.

Florida's promise

With economic slowdowns in other areas of the country, out-of-state bankers salivate over the population and economic growth in Florida. That's still the case even as the residential market has declined.

Colonial Bank is counting on that population and economic growth to fuel its expansion. In addition to sites north of Tampa, it has contracts for sites in Sarasota, North Port, Cape Coral and it's scouting new areas east of Interstate 75 in counties such as Hendry, Glades and DeSoto.

One area that appears very promising is Charlotte County, which has been busy rebuilding after Hurricane Charley in 2004. "A lot of federal money has poured into that place," Parrish says.

At a new branch on Toledo Blade Boulevard in Port Charlotte, deposits rose almost sixfold from $4.1 million in June 2005 to nearly $35 million in June 2006, according to data from the Federal Deposit Insurance Corp. (FDIC).

It's a huge investment. Colonial will spend as much as $15 million in the next two years just to bank land for the future expansion. "You balance long-term growth with short-term profit," says Parrish.

But don't bet against Parrish. He has worked for Colonial since 1984, when the bank had just $166 million in assets. Today - 66 bank acquisitions later - it has $22 billion. Parrish was Colonial's first management trainee and has been in charge of the Southwest Florida region since February 1999, soon after Colonial entered Southwest Florida by buying Fort Myers-based First Independence Bank of Florida and First National Bank of Bonita Springs.

Much of that future branch growth will be done internally. Although Colonial has been a bank acquirer in the past, it plans to grow by building branches. "There's not that many good banks out there," Parrish says. "We don't want to buy a problem bank."

Parrish believes that the same pressures affecting his profits will force smaller, less profitable banks to close or sell out to competitors. That will free up people he can hire to staff the new Colonial branches. "It's amazing how much talent there is here," Parrish says says.

Pressure on margins

Typically, banks make money by paying depositors lower rates and lending that money to customers at higher rates and pocketing the difference.

But in unusual times like these, when short-term interest rates are higher than long-term interest rates, it's harder for banks to make money and Colonial Bank is no exception. Its net interest margin declined from 3.81% in the second quarter to 3.64% in the third quarter of this year.

In addition, Colonial has grown more cautious about lending, particularly on larger real estate projects. "We look at those deals a lot more carefully," he says. A rebound in residential real estate is two years away, Parrish estimates.

To diversify away from its concentration in real estate lending, Colonial has focused on other kinds of customers, including commercial and industrial lending as well as small-business loans. "We saw that coming four years ago," Parrish says. "That's really helped us."

On the deposit side, Colonial is pushing noninterest-bearing checking accounts as high short-term rates make certificates of deposit and other interest-bearing accounts costly. One way the bank plans to do that is by improving its online banking and redesigning its Web site.

That's especially crucial to attract younger people. Parrish cites research that has found that 30% of people under age 30 have never been inside a bank because they do all their banking online.

Online banking is a good tool to attract new customers and retain existing ones. That's because it's such a hassle to change banks once customers start using an online checking account to pay everyday bills. "They're very sticky products," Parrish says.

Of course, convenience is one key to generating more deposits; hence the big push to open new branches in good locations.

Another big emphasis for the bank is generating more revenue from fee-based services such as financial planning, especially as pressure on lending margins builds. Overall, the bank's objective is to boost fee-based revenue from about 13% to 25%.

One way to do that is to offer such services to people who don't have big brokerage accounts today but may in the future. Successful money managers in Southwest Florida tend to ignore investors with less than $1 million in assets. "We'll talk to people with $250,000," Parrish says. "We want to grow with these people."

In addition, the bank plans to hire more financial planners to sell insurance and retirement plans and help high-net-worth individuals manage their assets. If it's successful, these revenues can offset the declining margins in lending.

Colonial's back-office operation in Orlando handles much of the processing and accounting function. This gives Parrish and his staff more time to focus on building the business.

Building local ties

One way the bank has attracted more business is by setting up local boards with well-connected individuals. The board that oversees Southwest Florida includes local commercial real estate broker Frank D'Alessandro and commercial construction executive Steve Shimp, among others. They have the authority to approve loans of up to $20 million without routing the loan request through Montgomery, Parrish says.

The bank also has established advisory boards on a more local level in communities such as Lehigh Acres, Fort Myers Beach, Bonita Springs-Estero, and Sanibel Island.

"These people are our eyes and ears," Parrish says. Each advisory board member receives undisclosed stock compensation for attending board meetings. The bank also shares economic data that it collects in return for local insights and referrals.

From a marketing standpoint, Colonial Bank spends a lot of its budget on charitable causes instead of advertising. The company routinely sponsors causes ranging from the United Way to the Boy Scouts and educational foundations such as the Florida Gulf Coast University Foundation and Junior Achievement.

Parrish and Robert Bassett, Colonial's area president for Lee and Collier counties, network relentlessly at countless grand openings, luncheons and dinners. "It's a contact sport," Parrish says. Pressing the flesh isn't just to land new customers. Parrish says networking events are a great way to meet and recruit new employees.

Still, as the bank grows in the number of branches and geography it will be hard for Parrish to cover so much ground. The bank plans to launch a new branding campaign on Jan. 8. Although Parrish won't disclose the details, he says it's not going to be focusing on any single product or service. "It's all about differentiating ourselves," he says.

At a glance

Colonial BancGroup

Headquarters: Montgomery, Ala.

Chief executive: Robert Lowder

Total assets: $22 billion

Number of branches: 303

Stock symbol: CNB

Recent stock price: $24

Market capitalization: $3.67 billion

Dividend/yield: $0.64/2.8%

Price-earnings ratio (trailing 12 months): 14

Sources: Company filings, Yahoo Finance.

Growing market share

Montgomery, Ala.-based Colonial BancGroup appears to be gaining ground on other large competitors in Florida, despite its smaller size. Here's how it compares based on its market share for deposits in Florida:

%Market share %Market share

Rank Company 6/30/2005 6/30/2006 % Change

1 Wachovia 20.61 19.93 ?3.3%

2 Bank of America 20.65 19.05 ?7.75%

3 SunTrust 10.01 9.74 ?2.7%

4 Regions 5.20 5.07 ?2.5%

5 Washington Mutual 3.43 3.37 ?1.75%

6 Colonial BancGroup 2.42 2.68 10.74%

Source: Colonial BancGroup presentation at 2006 Merrill Lynch Banking and Financial Services Conference based on figures from SNL Financial.