Southern Discomfort

Southern Discomfort

By Francis X. Gilpin

Associate Editor

Thomas L. Wilson says he tries to stick by customers, through thick and thin. "When customers have problems," says the president and chief executive of Southern Commerce Bank, "they become the bank's problems."

But the price of loyalty can sometimes be high in Wilson's business.

In November 2002, federal and state regulators slapped the Tampa bank with a cease-and-desist order. Immediate changes in how Southern Commerce makes loans and manages capital were required.

"They are not intended to be casual documents," Wilson says of such orders. "They are intended to get the attention of the ownership and management."

Wilson says the message was received at Southern Commerce's lone office, across Interstate 4 from the Ford Amphitheatre and the Florida State Fair.

Almost 2 1/2 years later, Wilson believes the $73 million-asset bank has turned a corner. Southern Commerce reported a 2004 profit of $143,000, modest yet preferable to a nearly $1 million loss two years earlier.

"The worst part about this is it's somewhat embarrassing because it stains your reputation as a good banker," says Wilson, 59, an industry veteran who came to Tampa 15 years ago. "On the other hand, there's a certain amount of satisfaction in being able to work through the problems and see them all behind us at this point in time."

Don L. Woodland, director of the Graduate School of Banking at Louisiana State University, says the difficulties of big customers can quickly sour results at small banks. "It can happen to anybody," says Woodland.

How did it happen at Southern Commerce?

This was hardly the scenario envisioned by the founders of what was originally called Parkway Commerce Bank in the summer of 1987.

Wilson had run a couple of Greater Milwaukee banks with Wisconsin engineer Raymond J. Prossen. When Prossen moved to Tampa, he asked Wilson to establish another bank in Florida. They raised $3 million from investors back home and invited local business owners to join, including Tampa financial adviser Laura J. Waller.

Importing what had been a successful strategy in Wisconsin, Southern Commerce ignored consumer banking and went after strictly small businesses with annual sales of between $1 million and $10 million.

That single office off I-4 is not in a high-profile retail district. Southern Commerce is located in a small office park that is not easy to get to. The bank has no tellers and no lobby to speak of.

Southern Commerce employees toiling at their desks are likely to be handling Small Business Administration loans or paperwork from the bank's wholesale mortgage business.

Wilson says every community bank has a niche. His is using the latest technology to serve SBA borrowers as well as relieve small lenders of the hassle of selling mortgages on the secondary market.

Southern Commerce has been one of Florida's 10 biggest SBA loan originators for more than a decade, according to Wilson.

Wilson is a big believer in the SBA, which is sometimes criticized for complex loan processes. "All of the horror stories - real and urban legends that are out there - are really caused by banks, not by SBA," he says. "We eliminate the customer interface with the SBA and the program goes a lot smoother because we do it the way the SBA wants it."

The bank has also gotten into wholesale mortgages. For loan brokers and other banks, Southern Commerce will schedule a real estate closing, prepare the documents, and handle the aftermath, including the transfer of mortgages to investors.

Without a branch network, however, where does Southern Commerce get deposits?

Approximately 15% of deposits come from business customers who maintain accounts at the bank. The rest walk in the door anytime Southern Commerce advertises attractive rates on certificates of deposit.

"If we pay a little bit higher rate than the downtown banks, we can get virtually all of the money that we need," says Wilson. "When we want deposits, we raise our rates a little bit. And, when you're not so eager for deposits, we're not quite so aggressive in terms of pricing."

Southern Commerce's year-end deposit counts headed south during the turmoil of the 2002 regulatory order. But deposits rebounded to $63 million on Dec. 31, up from a five-year low of $42 million in 2003.

The story of the regulatory order dates back to 1999.

With the economy beginning to soften, Wilson says a half dozen large customers developed liquidity problems. One particular customer, described by Wilson as a subcontractor on state government projects, ended up filing a lawsuit against a prime contractor.

Southern Commerce lawyers concurred with the customer's counsel that the multimillion-dollar claim had merit. So the bank backed the subcontractor.

"It turned out to be a bad decision, despite all of our research and investigation about the validity of his claim," says Wilson.

The subcontractor got zilch from the courts.

On the heels of a 1999 loss of $967,000, Southern Commerce absorbed another $979,000 loss in 2002. The bank's balance sheet took a pounding. More than $1.2 million of core capital vanished between 2001 and 2002.

"We took too large of a risk in supporting a litigation claim," says Wilson. "You take a big loss and that gets everybody excited."

The regulators were most anxious. The Federal Deposit Insurance Corp. and what is now the Florida Office of Financial Regulation demanded that Southern Commerce stop "unsafe and unsound banking practices."

Their Nov. 22, 2002, order cited "a large volume of poor quality loans," "inadequate equity capital and reserves," and "hazardous lending and ineffective collection practices," among other flaws.

Of 13 specific directives from regulators, Wilson says he considered two to be most critical: raise additional capital and clean out the loan portfolio.

Although never sinking below the level at which regulators consider a bank to be well capitalized, Southern Commerce was given 2 1/2 years to reduce classified assets from $5.5 million to no more than $2 million.

As that deadline approaches, Wilson says the bank has written off enough bad debt and sold off enough repossessed property that classified assets are now only about $270,000, which represents the balance on two loans that are currently performing.

The portfolio cleanup took a while because Wilson had to wait for a decent offer on undeveloped residential acreage at World Golf Village near St. Augustine.

As for capital, Southern Commerce rounded up $5 million more of it at the end of 2003 in a private offering supervised by Anderson & Strudwick Investment Corp. Two executives from the Richmond, Va.-based investment bank, Lawrence C. Fentriss and L. McCarthy Downs III, have joined the Southern Commerce board of directors.

Wilson, who held onto his job, says the regulators didn't panic. "They can virtually come in here and micromanage the bank," he says. "They never did that. They issued the order. We sent in the monthly reports, as we promised to do as part of the order, and they've pretty much left us alone to fix the problems."

C. Benton Eisenbach Jr., a state bank regulator in Tampa, declined comment.

The regulatory directives have been accomplished, according to Wilson. "We believe we have addressed all of those things," he says. "We would certainly hope the regulators would acknowledge that in an upcoming examination and have the order removed."

Raymond Prossen, the now-retired engineer who co-founded Southern Commerce, says the wait has been frustrating for him and his fellow bank directors.

"We think we've met all the requirements and did so quite a while ago," says Prossen. "It's not only costing us money to continue under this order, it's costing us business."

Don Woodland of the LSU banking school says extra regulatory supervision is rarely the cause of lost opportunities. "Generally, it does not hurt that badly," says Woodland. "Luckily, the economy is strong."

If and when the order is lifted, Wilson says Southern Commerce will reinstitute a growth plan that it had to shelve six years ago.

"We're very excited that we consider ourselves past our problems," says Wilson, who recently mailed a personal appeal for new business to 7,000 Tampa Bay area businesses with good credit ratings. "Our focus for the next several years is growing the bank, profitably growing the bank."

By the numbers

$s in 000s 12/31/04 12/31/00

Total assets $72,758 $60,852

Total deposits $63,092 $55,511

Noncurrent loans and leases $142 $1,197

Net income $143 $95

Return on assets 0.23% 0.16%

Return on equity 1.53% 1.94%

Efficiency ratio 89.81% 80.93%

Total risk-based capital ratio 19.09% 11.12%

Source: Federal Deposit Insurance Corp.