Another Good Year?

Another Good Year?

By Francis X. Gilpin

Associate Editor

Where will it all end?

Since the year 2000, the Nasdaq bank stock index has shot up to record heights. Many of the approximately 600 regional financial institutions that make up the index have watched their stocks go through the ceiling, thanks to cheap money and a fevered demand for mortgages. This barometer of community bank profitability has out-performed both the Dow Jones Industrial Average and the overall Nasdaq by better than two-fold, according to Jacksonville investment bank Allen C. Ewing & Co.

In Florida, local names such as First National Bancshares Inc. in Bradenton and First Community Bank Corp. of America in Pinellas Park have seen their share prices double, with the added impetus of out-of-state banks showing a willingness to pay outrageous premiums for their competitors.

But all good things have to come to an end, donit they?

Benjamin C. Bishop Jr., chairman of Ewing & Co., doesnit necessarily think it has to be that way in the Sunshine State during the coming year. iFlorida banks are going to continue exceeding expectations for investors not only in Florida but around the country,i says Bishop.

Miami bank consultant Kenneth H. Thomas, who operates a Web site called BranchLocation.com, says there is nothing in his crystal ball that should alarm prudent Florida bank executives.

iThe speed limit is 70 miles an hour on I-75,i jokes Thomas. iI donit think thereis going to be any slowing down for your bankers in i05.i

The Gross Domestic Product should expand by a healthy 3% to 4% and, based on that and other economic data, the Federal Reserve will gradually continue to raise the federal-funds rate by another 100 basis points or so, predicts Thomas.

With Fed governors telegraphing their rate moves to the financial markets, Bishop says bankers have prepared accordingly. iThis is the perfect time to raise rates, if there is such a thing,i he says.

John P. OiNeill, president and chief operating officer at Century Bank FSB in Sarasota, is an example of what Bishop is talking about.

OiNeill says Century Bank has reduced its exposure to rising rates by pushing or acquiring more products with floating rates. iWith our balance sheet, weire positioned for a higher interest rate environment,i says OiNeill, whose bank earned $3.6 million through the first nine months of 2004.

When the final numbers come in for 2004, OiNeill says Century Bank, a unit of Century Financial Group Inc., should have revenue growth of 15% to 20%. He projects the same for 2005.

Punk Ziegel & Co. bank analyst Richard X. Bove is not as sanguine as Bishop and Thomas. As at OiNeillis institution, Bove says banks will finish 2004 with a strong fourth quarter. After that, however, he wrote in a recent quarterly analysis of industry trends: iThese appealing metrics are expected to deteriorate meaningfully in 2005.i

Among the reasons that Bove believes the party is beginning to wind down:

o Opportunities for home equity lending, the industryis fastest-growing lending category, are bound to dry up. iOne might argue that home equity lending is the most important product in banking,i says Bove. If so, that doesnit bode well for many banks as interest rates go up and, consequently, real estate appreciation moderates.

o A long-predicted recovery in commercial and industrial lending will finally materialize in 2005. But that could be bad news for Gulf Coast community banks, which depend heavily on real estate development. The C&I category may replace residential lending as the biggest revenue source at some banks, particularly larger ones.

o Operating costs are starting to go up and will keep going that way. Bove, a frequent critic of branch expansion from an investoris standpoint, says he suspects that is why non-compensation expenses across the industry spiked in 2004, although federal regulatory data donit provide sufficient detail to be sure. In 2005, depositors shall be more assertive about better rates for their savings as inflation ticks up, adding to bank interest expense.

Thomas says Florida bankers enjoy some insulation when they have to boost rates on certificates of deposit and the like. iThereis so much diversity in the Florida markets and theyire all growing,i says Thomas, who notes that many local banks actively solicit small businesses for loans and help manage the wealth of their owners. iIn Florida, banks can just turn on what we call the erate fauceti and the money comes pouring in.i

Bishop doesnit expect the yield curve to flatten so fast it catches bankers by surprise. Florida bankers are still able to lock in short-term deposits at fairly low rates and loan that money back out for longer stretches at higher interest, says Bishop.

iTheyill enjoy wider spreads, on top of the growth thatis happening in the Florida economy,i Bishop says.

Oh yes, the Florida economy. Thatis one of the reasons that Bishop says out-of-state banks will be forced to keep paying out-of-whack prices for the chance to move into or expand in Florida.

Transaction multiples increased by 35% between 2001 and 2004, according to Ewing & Co. researchers. Contributing to that trend were the 2004 deals for some Gulf Coast banks, such as Fifth Third Bancorpis acquisition of Naples-based First National Bankshares of Florida Inc. at 3.32 times book value and Whitney Holding Corp.is purchase of Palm Harbor-based Madison Bancshares Inc. for 3.81 times book value.

Besides the prices, Bishop makes a subtler point about why investors have been attracted to bank stocks in recent years. The heavy regulation of the banking industry, which traditionally has been seen as a negative on Wall Street, has been comforting to investors abused by flashier issues such as Enron and WorldCom.

The optimistic Bishop and perhaps the more realistic Bove do agree on one thing. iBank earnings need to catch up with prices,i Bishop and Ewing & Co. Vice President Robert J. Chassman recently wrote.

Bishop seems to think they can. Bove is doubtful. After community and regional bank values resumed a climb five years ago following a period of rising interest rates, Bove says: iThey continued to rise as mergers developed in the industry. We are convinced that these companies are now overvalued in the main. Their earnings will not collapse near-term but their outlook is for low growth for some time.i

LOCAL BANKS AND THRIFTS

2004 results through Sept. 30, ranked by asset size ($s in 000s)Net ReturnReturn

NameCityAssetsDepositsincome(assets)(equity)

Raymond James Bank FSBSt. Petersburg$963,339$773,036$3,9540.597.13

The Bank of TampaTampa$709,070$621,342$4,0320.8011.43

United Bank and Trust Co.St. Petersburg$468,510$342,064$4,1401.196.51

Century Bank, a Federal Savings BankSarasota$463,647$335,970$3,6381.1017.43

Coast Bank of FloridaBradenton$357,626$304,211$6570.283.33

Peoples BankPalm Harbor$344,187$229,942$2,1080.884.36

1st National Bank & TrustBradenton$311,121$260,639$2,2311.0012.43

First State BankSarasota$242,549$205,262$1,5140.8911.91

Platinum BankBrandon$229,210$205,933$2,0371.3118.44

First Community Bank of AmericaPinellas Park$224,372$190,867$1,5251.0012.30

Community National Bank of Pasco CountyZephyrhills$208,969$190,218$2,1511.4419.54

The Bank of CommerceSarasota$194,503$169,407$1,0150.8010.25

People's Community Bank of the West CoastSarasota$189,545$161,698$5240.455.06

Sunshine State Federal Savings and Loan Assoc.Plant City$181,981$159,792$7390.544.76

Cornerstone Community BankSt. Petersburg$181,805$150,857$9560.819.09

Bay Cities BankTampa$179,094$153,191$8830.698.63

LandMark Bank of FloridaSarasota$167,164$147,329$5850.537.56

Community Bank of ManateeBradenton$152,986$134,530$6790.628.89

Bank of St. PetersburgTampa$146,815$108,968-$1,495-1.64-8.89

First Commercial Bank of Tampa BayTampa$142,154$120,625$5770.608.22

Signature BankSt. Petersburg$138,777$123,043$5350.566.82

Terrace BankTampa$138,434$116,620$8960.8711.48

First Citrus BankTampa$135,188$116,259$5390.564.41

Bay Financial Savings Bank FSBTampa$134,770$105,969$8210.915.18

Valrico State BankValrico$129,863$112,320$1,2201.2915.35

Horizon BankBradenton$117,513$108,874$6460.8211.97

United Bank of the Gulf CoastSarasota$114,917$88,829$2230.281.52

Flagship National BankBradenton$112,350$102,367$6380.8012.66

TCM Bank, National AssociationTampa$112,329$98,483$4350.595.14

Manatee River Community BankPalmetto$110,897$101,813$5820.7610.35

Community National Bank of Sarasota CountyVenice$103,432$94,588$1,5652.1227.76

Heritage Bank of FloridaLutz$103,128$87,680$7501.0511.30

Suncoast BankSarasota$98,715$90,890$2800.414.99

First National Bank of PascoDade City$88,633$73,870$7541.1614.36

Old Harbor BankClearwater$79,165$64,784-$201-0.53-3.06

Century Bank of FloridaTampa$77,429$59,023$4180.826.69

The Palm BankTampa$73,794$53,730-$29-0.07-0.37

First Home BankSeminole$68,946$57,437$1,1782.2624.69

Southern Commerce BankTampa$68,413$58,898$680.150.97

Hillsboro BankPlant City$67,193$58,088$5771.199.15

First Bradenton BankBradenton$65,709$60,188$4030.8810.80

GulfStream Community BankPort Richey$52,252$43,676$1580.473.75

First Priority BankBradenton$47,656$40,058-$776-3.05-13.30

The Bank of VeniceVenice$37,250$31,432-$207-0.89-4.75

First National BankTarpon Springs$24,814$21,645$220.120.97

First America BankBradenton$24,022$14,575-$589-4.06-8.25

Members Trust Co.Tampa$20,919$500-$700-5.42-5.68

Source: Federal Deposit Insurance Corp.