How High the Rates?

How High the Rates?

A slight boost in interest rates won't faze bankers in 2004.

By Francis X. Gilpn

Associate Editor

Gulf Coast banks have enjoyed a nice run during the last couple of years. Can those solid results keep coming in an environment that is anticipating higher interest rates?

Roger L. Baldinger thinks so. "It's going to look a lot like '03," Baldinger says of the coming year. A repeat of 2003 would be fine with the president and chief executive of Community National Bank of Sarasota County. The $87 million-asset Venice bank had the highest returns on assets and equity of any Gulf Coast-based bank or thrift during the most recent quarter.

"If interest rates go up a quarter or a half a percent, that's not going to change much for our retail customers," says Baldinger.

Karen Dorway of Bauer Financial Inc. is optimistic as well. "We don't see much of a downward trend in profitability," says Dorway, president of the Coral Gables bank research firm. "Rates aren't going to skyrocket." (Community National's employee-owned holding company is a subchapter S corporation, entitling it to more favorable tax treatment, which potentially results in higher profits than peer institutions.)

But Richard X. Bove, a St. Petersburg-based bank analyst for Hoefer & Arnett Inc., says bankers are going to have to do different things to continue making money.

The days of cheap money are fading into a pleasant memory for bankers. The spreads between mortgages and money costs were just below record levels early this fall, notes Bove, creating unusually big profits. "We simply cannot accept the fact that this will continue," Bove wrote last month.

Although net interest margins will compress as expenses rise, Bove foresees fewer non-performing assets on the books. Commercial and industrial lending would also pick up in a stronger economy.

The profits certainly won't continue to come from home mortgage lending, if Washington Mutual Inc.'s recent experience is any indication.

The Seattle-based thrift, the second-biggest home lender in America, rather suddenly this month cut its earnings estimates for this year and next. Washington Mutual, which has been looking to expand in Florida, cited weaker demand for residential loans.

A recovery of the American economy that is gradual would make for an easy transition at many financial institutions. Banks are structured more efficiently to endure rate fluctuations than they used to be, according to Dorway. "Their risk management is better than 10 or 15 years ago," she says.

James L. Pappas, a professor of banking at the University of South Florida's College of Business Administration, says banks are the first to benefit when inflation creeps back into the economy. Interest rates increase faster on the asset side, which is where the loans are on the bank balance sheet.

The interest rate spreads are already tumbling back from near-historic levels. Bove says short-term rates could rise rapidly, causing trouble for asset-sensitive banks.

The longer rates, which have been going up for a while in anticipation of the return of inflation, slice into asset and book values while diminishing stock prices.

President George W. Bush is pursuing a risky fiscal policy in an imitation of President Lyndon B. Johnson during the 1960s, according to some economists.

Like LBJ, Bush is simultaneously buying "guns," funding anti-terrorism measures and war in Iraq and Afghanistan while providing "butter" in the form of tax cuts and expanded Medicare benefits. That translates into huge federal budget deficits, as in the Vietnam era.

If gross domestic product jumps, everything should be fine. "Without some shock, the economy should continue to grow, and Florida will certainly participate in that," says Pappas.

If not, however, 1970s-style inflation could come back with a vengeance. Bush's pre-election "stimulate now, pay later" stance, as Bove calls it, will limit future business investment as the U.S. Treasury borrows to keep up with a $7 trillion national debt.

What would this mean for banks?

Baldinger feels the consequences of Bush policy won't be felt for a long time, if ever. The Venice banker jokingly predicts Hillary Rodham Clinton will someday reprieve the role of Jimmy Carter, whose inability to deal with 1970s stagflation doomed his presidency. "By that time, Hillary will be president," Baldinger says with a laugh. "Hillary in '08!"

Bove's more sober conclusion is that short-term rates will increase with the longer ones. For banks, there will be more arbitrage necessary to neutralize their exposure.

Dorway says higher rates would be welcome in most corners of the Gulf Coast banking, even if the increase is 75 basis points or more. "That's actually good for banks because the margins were getting a little thin with all the refinancings," says Dorway. "Banks with maturity portfolios didn't do as well as the banks making fees off the refinancings."

The community and medium-size banks along the Gulf Coast are playing it smart, according to Dorway. "They're not trying to compete on price, with the big banks," she says. "They're emphasizing service, the 'we know you when you walk in the door' approach."

Bove sees a little more merger activity. As profits are harder to come by, smaller banks have the incentive to sell out.

While acquisition is still the cheapest method of entry into the Florida banking market, there aren't many bargains. But buyers are looking beyond valuations. "Price won't be the issue," says Pappas. "It will be finding community banks that have enough of a franchise to make them attractive to the banks that want to come into or expand in Florida. Everybody's going to want to be here, if they want to have a national presence of any kind."

Gulf Coast-based banks and thrifts BY ASSETS

Year-to-date figures as of Sept. 30 (Dollars in thousands)

ReturnReturn

NameCityAssetsDepositsNet incomeon assetson equity

First National Bank

of FloridaNaples$2,900,204$2,262,393$25,2751.1913.02

Republic BankSaint Petersburg$2,773,995$2,185,942$10,3850.526.01

Atlantic States BankFort Myers$1,127,814$866,875-$1,155-0.14-0.94

Florida BankTampa$959,215$816,943$5,5960.8610.6

Raymond James BankSaint Petersburg$915,743$779,515$4,3610.648.75

Orion BankNaples$863,503$683,457$9,2631.5218.83

Gold BankBradenton$794,434$552,182$3,6520.659.09

Fifth Third Bank FloridaNaples$703,477$597,960$3,3660.648.56

Bank of TampaTampa$602,262$536,998$3,6450.8311.57

Florida Community BankImmokalee$502,956$409,456$6,4521.6618.32

United Bank and Trust Co.Saint Petersburg$411,302$306,781$2,9981.037.22

Century BankSarasota$385,179$286,462$2,8771.0716.32

Premier Community

Bank of FloridaLargo$374,477$302,277$3,7541.3716.48

Peninsula BankEnglewood$310,165$280,864$2,7731.3215.53

Peoples BankPalm Harbor$249,983$196,399$2,4011.3519.18

Riverside Bank

of the Gulf CoastCape Coral$247,570$204,171$2,1821.3417.11

1st National Bank & TrustBradenton$242,208$192,999$1,7621.0211.37

Community Bank of NaplesNaples$233,388$173,846$2,6401.5921.48

Coast Bank of FloridaBradenton$224,651$189,587$100.01

Pelican National BankNaples$205,834$172,673$3110.22.76

Madison BankPalm Harbor$197,445$157,556$1,6561.1312.88

First State BankSarasota$195,536$168,543$4960.385.35

Community National

Bank of Pasco CountyZephyrhills$194,678$178,833$6680.528.09

Sarasota BankSarasota$186,965$153,305$1,4291.1315.43

Platinum BankBrandon$178,332$160,704$1,3701.0613.75

Sunshine State Federal

Savings and LoanPlant City$178,104$157,039$8310.625.65

First Community

Bank of AmericaSaint Petersburg$169,424$137,731$1,0760.9210.8

Old Florida BankFort Myers$155,928$121,985$4570.514.28

First Florida BankNaples$154,790$139,935$1,1261.0512.61

Charlotte State BankPort Charlotte$146,711$129,776$1,6681.6719.41

Bank of FloridaNaples$145,409$130,655$5730.588.05

Englewood BankEnglewood$143,418$128,978$9770.8911.36

Southern Community Bank

of Southwest FloridaBonita Springs$141,957$127,803$7170.738.13

Bay Cities BankTampa$136,996$109,762$6690.728.74

Bank of CommerceSarasota$134,547$117,711$4380.494.7

Terrace BankTampa$131,489$119,455$7010.749.52

Community Bank

of ManateeBradenton$127,693$110,574$3910.436.34

Cornerstone

Community BankSaint Petersburg$126,888$113,130$7640.897.91

Valrico State BankValrico$123,534$110,527$9971.0914.53

Tarpon Coast

National BankPort Charlotte$123,411$112,521$7230.8711.62

Premier Community BankVenice$123,084$88,902$5930.639.41

First Community Bank

of Southwest FloridaFort Myers$119,172$105,108$1,0951.2115.17

Florida Gulf BankFort Myers$119,025$94,689$1450.191.85

Edison National BankFort Myers$116,133$106,267$3400.395.89

Bay Financial Savings BankTampa$108,607$80,930$1,1461.457.69

LandMark Bank of FloridaSarasota$108,083$92,736$3660.515.49

Busey Bank FloridaFort Myers$107,657$91,845$1700.261.99

First Commercial

Bank of Tampa BayTampa$106,229$91,208$3990.547.16

People's Community

Bank of the West CoastSarasota$105,254$95,411$2860.394.69

Signature BankSaint Petersburg$103,659$90,079$3690.514.98

First Citrus BankTampa$102,462$84,257$3660.515.57

United Bank

of the Gulf CoastSarasota$102,376$80,278$2760.422.76

Flagship National BankBradenton$91,532$83,535$2890.446.22

Community National

Bank of Sarasota CountyVenice$87,318$79,300$1,2832.0326.4

Manatee River

Community BankPalmetto$86,695$79,067$5280.8411.29

Horizon BankBradenton$83,998$77,002$2630.456.68

TCM BankTampa$82,457$71,674$1590.282.52

Heritage Bank of FloridaLutz$80,927$72,445$3690.718.64

First National Bank of PascoDade City$80,336$70,913$6341.113.78

Bank of St. PetersburgSaint Petersburg$77,816$62,230$1830.311.82

Suncoast BankSarasota$69,507$61,596$1000.22.29

First Home BankSeminole$67,890$56,234$9051.8920.71

Bank of NaplesNaples$62,936$57,163$2690.66.47

Royal Palm Bank of FloridaNaples$58,669$49,784-$288-0.72-4.32

Hillsboro BankPlant City$57,897$49,519$4711.118.03

Premier Community Bank

of Southwest FloridaFort Myers$57,082$47,083$1100.282.82

Century Bank of FloridaTampa$54,115$35,856$2360.643.94

Sanibel Captiva

Community BankSanibel$52,968$42,483-$207-0.57-4.39

First Bradenton BankBradenton$49,546$44,598$3060.848.79

Southern Commerce BankTampa$44,822$40,311$270.080.84

Palm BankTampa$41,898$31,081-$1,222-5.69-16.47

GulfStream Community BankPort Richey$36,335$32,001$780.32.43

First National BankTarpon Springs$27,114$23,899$910.424.1

Bank of VeniceVenice$20,296$14,207-$680-5.03-14.62

Old Harbor BankClearwater$16,801$9,566-$451-3.58-8.32

Marco Community BankMarco Island$14,058$7,841-$365-3.46-8.07

Source: FDIC