On the Horizon

On the HorizonAfter a slow start, a community bank that stresses commercial lending over residential in booming Manatee County sees higher profits ahead.By Francis X. GilpinAssociate EditorThe loan committee meeting did not go well for Charles S. Conoley on the morning of Dec. 9, 1999. The president and chief executive of Horizon Bank, then open only a few months, wanted approval for an $800,000 line of credit to a fledgling medical practice.Conoley told directors on the committee he'd dealt with Healthcare America Medical Group Inc. before at American Bank of Bradenton. The collateral was primarily Medicare receivables that usually get collected within 45 days.But Bradenton real estate broker-developer Thomas C. Bennett Jr. was not reassured. A veteran of community bank boards, Bennett was dismayed by the errors and omissions in the net-worth forms filled out by Healthcare America's physician owners. "Mr. Bennett stated that he felt that this was a sloppy and incompetent approach to lending to accept these types of financial statements," according to minutes of the loan committee meeting.From this unsteady beginning, Horizon Bank has blossomed into one of the sturdier performers among a septet of community banks that sprang up in the Sarasota-Bradenton market around the turn of this century. Although Horizon's deposit growth has trailed most of the others, Conoley points with pride to the fact that his Oneco bank has been a lot kinder to investors."There are several that are bigger and make money than us, but they've got a lot more capital," Conoley says of the rivals. "When you really look at return to the shareholder, we're right there."Horizon, a subsidiary of publicly traded Horizon Bancorp Inc., reported a modest 7.45% return on equity for 2003. That was second only to the 7.85% of Bradenton's Flagship National Bank among the seven upstart banks.The Healthcare America loan, troubled from the start, is a study in Conoley's deliberate approach. While pushing residential mortgages would seem to be a no-brainer in the sprawling suburbia that is Manatee County, Horizon specializes in riskier yet potentially more profitable business loans. At the end of 2003, nearly 17% of Horizon's loan portfolio was made up of commercial and industrial loans. Only four other banks chartered on the Gulf Coast had more than 10% C&I loans, according to Hovde Financial LLC.Conoley's strategy has positioned the bank to reap even higher returns than peers, now that business expansion is picking up along with the economy.The tortured history of the Healthcare America loan also provides a rare glimpse into the sharp-elbowed world of small-town banking in one of the most competitive markets in the country. For all the loan's difficulties, including a bankruptcy reorganization, Conoley says Horizon eventually was repaid.Back in December of 1999, however, it was not certain the loan would be made at all.After Bennett's blistering critique, the loan committee minutes show Conoley took exception to the comments and withdrew the Healthcare America request. Three other Horizon directors questioned Healthcare America's financials, too.Yet three weeks later, as the holidays wound down, the same committee approved the one-year loan after Healthcare America put up additional collateral. Bennett still opposed the loan. With a negative book value of $1.2 million and Healthcare America just then breaking even on a cash-flow basis, Bennett thought the borrower was too heavily leveraged.Collateral, and who was first in line to claim it in a worst-case scenario, became an issue when Healthcare America's initial team of spendthrift executives drove the company into Chapter 11 proceedings. (See "Business Malpractice?" GCBR, Sept. 21-Oct. 4, 2001.)More than a quarter of the $800,000 revolving line of credit from Horizon went to retire the balance on an earlier loan written by Conoley while he was a vice president at American Bank.Conoley targeted former customers such as the Healthcare America doctors for his new bank. "The Healthcare loan was a relationship that I was looking to move to Horizon," Conoley later acknowledged at a deposition related to the bankruptcy case. American Bank officials, who were shopping their institution, disliked the poaching."American Bank didn't want Horizon Bank to have any loans of American Bank," Conoley testified at the deposition. "Their policy was they were not going to sell any loans to Horizon Bank because a large portion of their loan portfolio at American ... were loans that I generated. And I started a new bank and they didn't want to make it any easier than possible for me to move loans from American Bank to Horizon Bank."American Bank refused to assign the security interest for loans to Horizon whenever Conoley wooed away a customer. So, as occurred with the Healthcare America loan, American Bank's security interest in a borrower's assets was discharged with the loan payoff and Horizon had to perfect a new pledge of the assets.The policy of American Bank created a surprise for Horizon when Healthcare America filed for bankruptcy protection in 2001. Instead of a November 1996 security interest inherited from American Bank, Horizon had one of February 2000 vintage. In the interim, evidently unknown to Horizon honchos, a Cleveland financier of medical equipment purchases filed a lien of its own in 1999 on Healthcare America assets.Last year, U.S. District Court Judge James S. Moody Jr. ruled in Tampa that Horizon lost a priority claim on Healthcare America's assets when the company refinanced the American Bank loan. "Equity helps those who help themselves and here Horizon did not even try to help itself," Moody wrote in his opinion.The ruling might have consoled American Bank. But Conoley's old employer was long gone by 2003, gobbled up by Gold Bank.Fortunately for Horizon, Healthcare America didn't have to be liquidated. "They came out of bankruptcy a couple of years ago," Conoley says of the company's new management. "They pretty much did everything they said they were going to do."Dealing with overdue loans comes second nature to Conoley.The 45-year-old Purdue graduate started in banking at an Indiana institution that was operating under a memorandum of understanding from the Federal Deposit Insurance Corp. The regulators had forced out the top executives and Conoley got an early lesson in bank turnarounds. "I learned a lot about problem loan workouts and cost control," he says.Conoley preaches patience. "I usually feel that if I can negotiate directly with customers that are cooperative [and] that might be having problems, it's usually the best result for everybody," says Conoley, who worked in special assets at Barnett Bank for a time after moving to Florida. "When you start getting into litigation, the attorneys all got to get paid. You usually end up back where you would have got if you'd just worked it out."The Hoosier didn't need to be sold on the virtues of the Sunshine State after Barnett called. "The last day I left Indiana," he says, "in fact, there was a blizzard. So they let everybody go home early. My car actually slipped off the road into the ditch. The next day, it's 78 degrees and the sun's out in Bradenton, Fla."Conoley split his Barnett tenure between Bradenton and Miami. But, after Hurricane Andrew blew through South Florida, he returned to Manatee in 1993 to work at American Bank.The breakneck speed with which founder Gerald L. Anthony built American Bank alarmed Conoley. "I didn't think the overall management of American Bank at that time was capable of running that size institution," says Conoley. "Looking at what was going to happen to earnings, there were major problems at American Bank. Somebody's going to have to come in and fix all this stuff."Conoley knew that would be a big bank. He wanted no part of that again.Surveying the banking scene in Manatee and Sarasota counties in 1998, Conoley saw an opening for a community institution. So did a few other people. Within two years, seven community banks would be chartered in the two counties.Horizon began with Conoley and a telephone at a conference table in the Bradenton boardroom of bank director David K. Scherer's construction company. Conoley, a commercial lender for most of his banking career, embraced that line of business."Commercial business has higher risks, so you should get a higher yield," says Conoley. "You also have more losses."Indeed, net charge-offs peaked at $171,000 for Horizon in 2001, when the bank reported a $609,000 operating loss. By last year, charge-offs were down to $89,000 while Horizon celebrated its second consecutive year in the black, with net income of $409,000.Rare is a Florida community banker who doesn't live and die by real estate lending. "They are heavily, heavily focused on real estate," says Hovde investment banker Nickolas J. Barbarine. "Dirt loans."But institutions such as the Bank of Tampa have demonstrated that a strong C&I component works wonders for the bottom line. "If you do it right, if you have the underwriting experience and can manage the yield, there's money to be made," says Barbarine, who calls Horizon a "business bank.""A lot of people say, 'Look at Horizon, they've had losses,'" says Conoley. "We had that built right into our model when we started." The bank has doubled its loan loss allowance since 2000.Conoley grew Horizon, which hit $100 million in assets just this year, at a much slower pace than Gerald Anthony's next creation, Coast Bank of Florida. For that, Conoley says he took some heat from his own directors.But, after Coast imploded last year and Anthony was dismissed, Conoley hears less criticism.Scherer says he and other directors take only calculated risks. "We have local businesspeople who know this community," says Scherer. "That's been this bank's greatest strength." Horizon opened its first branch at Blake Medical Center in Bradenton almost two years ahead of schedule. It took four-and-a-half years to reach $107 million in assets. The original plan was to get to $75 million in five years.At the Horizon annual meeting this month, Conoley will trumpet all this and more. The Blake location is a $30-million deposit branch, without much promotion. Annual growth rates of 20% to 30% might not turn heads in Florida, but bankers in most other parts of the country would settle for it."Things are good, but we've got a lot of competitive pressures," says Conoley.As Horizon's biggest shareholder when his options are counted, Conoley says the bank needs to do even more for investors.Conoley urged his original investors to stick with him for five years. They have - maybe too well. There is little trading of the holding company stock.The Horizon CEO would like to give those founding shareholders an exit strategy. He's looking into obtaining a trading symbol for Horizon this summer and ultimately getting listed as a Nasdaq small-cap stock. "That might put a lot more stock in people's hands where maybe they say, 'it's time to take profit now.' I get some trading going that way," says Conoley. "Right now, people want to accumulate. Nobody wants to sell. I guess that's a good sign."Horizon Bank$s in 000sDec. 31, 2003Dec. 31, 2000Total assets$90,221$27,658Net loans and leases$73,549$15,770Noncurrent loans to loans0.36%0.00%Net charge-offs$89$0Total deposits$81,707$23,470Total interest income$4,854$1,340Total interest expense$1,876$637Net interest income$2,978$703Net interest margin4.30%4.93%Net income$409-$705Equity capital$6,432$4,115Return on equity7.45%-15.87%Return on assets0.51%-4.26%Efficiency ratio78.77%160.59%Yield on earning assets7.01%9.39%Source: FDIC