The Spartan Approach

The Spartan Approach

By Francis X. Gilpin

Associate Editor

Micah J. Eldred could have picked a better year to open a securities brokerage. Eldred started Spartan Securities Group Ltd. in St. Petersburg in 2001.

"It was just in time for 9/11," says Eldred, the senior managing partner. With little exaggeration, he adds: "It was probably the worst time to start a brokerage firm in the last 100 years."

Four years later, Spartan Securities is still around. Not only that, it's expanding.

The broker-dealer announced in June it has begun making a market in the securities of 18 publicly traded Florida community banks, including four with headquarters in the Tampa and Sarasota markets.

The move could prove as savvy as Eldred's leap into self-employment was ill timed.

The stocks of Florida-based banks, though lightly traded, have become popular with patient investors looking for a relatively safe proxy for the state's explosive population growth. Florida banks, with the majority of their lending on local real estate, neatly fit that bill.

"De novos generally trade by appointment," says Eldred, referring to the infrequency with which the stock of young Florida banks changes hands.

Eldred figures Spartan Securities is breaking into a small-cap realm that isn't as hectic as, say, technology. At the same time, Spartan Securities can increase the liquidity of community bank stocks while perhaps pick up underwriting business from the executives of the institutions.

All of that nearly didn't happen.

Of his first year in business, Eldred says: "It was very, very difficult."

Eldred, 37, grew up in Florida. He started at Raymond James & Associates Inc. in 1990 while attending night classes for an economics degree from the University of South Florida. He traded convertible bonds, which give holders a right to exchange them for common stock of the issuer.

The pay was so good that Eldred suspended his pursuit of formal education when he realized USF wouldn't be offering the last few courses he needed for a while. Eldred hasn't given up on completing those final credit hours and getting his degree. "It's on my to-do list," he says.

But so were some other goals.

Eldred left Raymond James in 1997 and joined J.C. Bradford & Co. As a partner, he did mostly trading for the Nashville investment bank's own account.

In 2000, Paine Webber Group Inc. brought J.C. Bradford and consolidated the Tennessee trading desk into the main Wall Street operation. Paine Webber was acquired later that year by Swiss bank UBS AG.

Eldred wasn't interested in moving to New York. Instead, he took off several months to travel and then returned to the Tampa Bay area to go into business for himself.

With Eldred in charge, Spartan Securities opened with three employees. The terrorist attacks of Sept. 11, 2001, coming right after the tech stock bust and in the midst of a near-recession, complicated the birth of Spartan Securities. But Eldred gradually recognized that even tiny, privately held Spartan Securities had inherent advantages over competitors. He decided to exploit them.

Big investment firms, some of which had to answer to public shareholders, cut back as deals dried up. "They dropped a lot of opportunities," says Eldred.

The nimble newcomer was willing to stoop down and pick them up. "We had no fixed cost structure," says Eldred. "It was very easy for us to adjust."

Spartan Securities made friends in financial services with those who wondered where their investment bankers had gone. "You'd talk to a community banker," recalls Eldred, "and hear: 'I kind of resent that he was my best friend a couple of years ago. Now that I don't have any business for him, I don't see him.'"

By the middle of 2003, the markets were calmer and Spartan Securities had steadied itself. "The environment had solidified enough that we could implement the business plan that we had intended to do at the beginning," says Eldred.

Spartan Securities focuses on companies with less than $500 million in market capitalization, formerly considered big issues but often left to firms the size of Eldred's today. Ninety percent of these companies have no analyst coverage, according to Eldred. "They lack sponsorship," he says. "They're orphans out there."

Francis I. "Rip" duPont III likes it that way. Dupont is chairman and chief executive of First National Bancshares Inc., parent of Bradenton's 1st National Bank & Trust, one of the stocks Spartan Securities will be following.

"We discourage that," says duPont. Kowtowing to investment professionals can entail earnings forecasts and investor conferences, which duPont thinks pulls community bankers away from their game. "We're a bank," he says. "That's not our business."

First National Bancshares stock rose into the split-adjusted terrain of $30 a share in May but has since retreated to the mid-$20s.

The president and CEO of First State Bank, which serves Pinellas and Sarasota counties, welcomes brokerage attention. "I absolutely keep track of who is dealing in our stock," says Corey J. Coughlin, who believes the shares of his bank's holding company, First State Financial Corp., are undervalued. They were trading in the middle of July at around $13.

Coughlin, who has trips planned to talk up First State stock in Chicago and San Diego, doesn't see how a banker can ignore institutional investors. "If I had my druthers, I'd like to have individuals and families own the stock," he says.

But mutual funds and the like have a much bigger impact on Florida bank stocks, according to Coughlin.

Coughlin believes educating investment firms such as Spartan Securities about his bank lessens the chances that institutional investors will scoop up 50,000 shares of First State just to watch the price go up a quarter and dump it. That cycle can knock the price back below where it started.

"If you don't have heavy volume, they can flip like that, and that's not good for your stock," says Coughlin.

Such volatility in this industry sector is rare, however. In fact, community bank stocks are a little boring and attract cautious investors who don't mind holding shares for five or 10 years, says Eldred.

Since regulators tightened up in the 1990s, community bank stocks are about as safe as investment-grade corporate bonds yet have produced better returns in many cases since 2000.

"The risk/reward is pretty favorable for the investor," Eldred says. "It can be very difficult for banks to screw up."

Spartan Securities made the best of its baptism by fire. Since then, Eldred says the firm has been profitable for three consecutive years. The employee-owned concern has annual sales in the single-digit millions, he says. Eldred wants Spartan Securities producing better than $10 million in annual revenue within the near future.

The market-making activity in Florida community bank stocks is one way that Eldred sees the partnership achieving that goal.

After getting familiar with bank CEOs, Eldred says, he would like to hire an equity analyst and eventually ease into investment banking for community institutions. He envisions Spartan Securities someday co-managing offerings such as the recent $30.5 million sale of Winter Haven-based CenterState Banks of Florida Inc. stock, which was primarily underwritten by Keefe, Bruyette & Woods Inc.

But Eldred wants Spartan Securities to maintain the same humility that got the firm through the post-9/11 years. Although the firm enforces no sales quotas, he says it is still entrepreneurial.

"If you've got people who are extremely greedy at the top, that are earnings- and sales-driven, it's going to show up throughout the organization," he says. "Our goal is to continue building a firm that's perceived by clients, competitors and the regulatory authorities as a successful, ethical place that has high standards.

"We don't have the huge firm culture," he says, sitting in a windowless conference room near the pre-season ballpark of the Tampa Bay Devil Rays on the St Petersburg bay front. "It's a different mentality."

Spartan Makes a Market in Florida Bank Stocks

Spartan Securities Group Ltd. makes a market in the stocks of these Gulf Coast banks.

Market Avg. daily 52-week range

Holding company Headquarters Exchange Symbol Capitalization* Volume Low High

Coast Financial Holdings Bradenton Nasdaq Small Cap CFHI $64.4 4,208 $14.00 $19.24

First National Bancshares Bradenton Nasdaq Small Cap FBMT $81.0 708 $20.38 $33.75

First State Financial Corp. Sarasota Nasdaq National FSTF $75.3 6,800 $10.81 $13.85

Old Harbor Bank Clearwater OTC Bulletin Board OHBK.OB $22.7 0 $14.55 $16.00

* Dollars in millions Source: the Nasdaq Stock Market Inc.