Bank Turn

Bank Turn

By Francis X. Gilpin

Associate Editor

Ever thought about starting a bank? Crispin G. Stout has, since he was a little kid. Ever since the Brandon business consultant's grandfather founded a community bank back in New Jersey.

The 52-year-old Stout is not alone. So far this year, state regulators are entertaining 10 applications for new Florida banks. There were 16 filed for all of last year, including the Stout group's bid to open what would be called South Shore Community Bank.

Stout is very close to achieving his dream. He and 11 other founding directors hope by next month to finish raising $10 million in startup capital for the first locally owned bank to operate in the booming south Hillsborough County area in almost a decade.

It almost didn't happen. The man who first broached the idea to Stout probably won't be there for the grand opening late this summer. Stout wanted Robert Johns to be South Shore's chief executive. But Johns washed out in a grueling application process because he'd never run a bank before.

"If it was 10 years ago and the pool of talent was a little bit less, they might not be as concerned about that," Stout says of federal and state bank regulators. "These days, they can kind of pick and choose who they allow to be a president and CEO."

The Stout group eventually found Larry R. Tracy, who not only has run a bank but started one as well.

New banks are popping up all over the Sunshine State. This is the story of how one collection of dedicated businesspeople are getting a new bank - a de novo, in the industry lingo - off the ground in Apollo Beach.

Unsteady beginning

Stout and Johns met through the Greater Brandon Chamber of Commerce. After they decided to go for it, the two men began recruiting a board of directors. Johns, a Brandon bank branch manager, lined up the bulk of those investors.

A few of them were disappointed when federal thrift regulators, who received the group's first charter application, signaled that Johns wouldn't be approved to run daily operations. "That was tough for some board members who were pretty much on the board because of their relationship with him," Stout says of Johns, who couldn't be reached for comment.

Two prospective directors quit, but later rejoined the effort when a new application for a community bank was filed with the state. Fortunately for the investors, the federal Office of Thrift Supervision returned their $20,000 application fee.

For six or seven months last year, the bank organizers floundered. They dropped a Tallahassee law firm they'd been using and hired veteran de novo bank adviser Richard P. Hunt.

Hunt, 64, chairman and chief executive of Tampa investment bank Kendrick Pierce & Co. Inc., recommended bringing in Tracy. "He and I go back," Tracy says of Hunt.

Tracy had been east Hillsborough regional manager for Central Bank of Tampa before Mercantile Bank acquired it in 2003. His new bosses wanted Tracy to move out of commercial lending, his forte, to work with retail customers.

"I thought I was losing my opportunity to keep my hands in the commercial side of the business," says Tracy, 63, whose commercial clients had generated half of Central Bank's 2002 loan fee income.

Needless to say, Tracy was up for trying to rescue South Shore Community Bank in organization. "I've always known Larry to be a very stable banker," Hunt says.

Tracy came on as a $90,000-a-year consultant last October and got the paperwork for a state bank charter to regulators by December. Upon South Shore opening for business, Tracy will be president and CEO at an annual salary of $115,020, according to a stock offering circular for the proposed bank.

Along with Tracy's 40-plus years of banking experience, he helped to found Valrico State Bank in 1989. That couldn't have hurt the South Shore bank application.

Tracy says he learned a few things from his eight-year stint as Valrico State's president and CEO.

Chief among them: Keep the number of shareholders below 500, so the holding company doesn't automatically have to register its stock with the U.S. Securities and Exchange Commission. It took till last year for Valrico State to get out from under the SEC. As of the middle of April, South Shore had fewer than 100 shareholders, well below the SEC registration threshold.

Getting to work

In his seven months at South Shore, Tracy has spent considerable time looking for new investors beyond the directors, who are expected to own about 30% of the bank's common shares. Two community meetings for potential investors were held at a Ruskin country club, where Tracy, Stout and Kendrick Pierce executives pitched the stock.

During one such meeting in late March, Stout tells a crowd of retirees and middle-aged professionals that 2005 is the right time and south Hillsborough the right place for a community bank.

"It's a pretty young community," says Stout, standing in a dining room as guests munch on snacks and soft drinks.

Despite the presence of retirement haven Sun City Center, South Shore Community Bank's primary service area is filled with younger residents. Stout rattles off some of the demographics.

Almost 24% of those living between State Road 60 and the Manatee County line and between McKay Bay and Polk County line are ages 45 to 67. Just 16% are 65 years or older. Their median household income is a comfortable $51,000 a year.

Better still, the area's population is anticipated to increase 16% by 2009, as compared to an 11% rise for the whole of Florida.

Hunt's son, Kendrick Pierce Executive Vice President Jeffrey M. Hunt, steps up next to tout Florida bank stock performance. The 21 publicly traded issues of Florida banks have appreciated 94.38% in recent years. By contrast, a Nasdaq index of community bank stocks nationwide went up 25.66% and the Standard & Poor's 500 index just 2.34%.

South Shore stock is being offered for $10 a share, with investors required to purchase a minimum 1,000 shares. So anybody can buy in for $10,000.

Stout cautions the crowd that South Shore stock won't be registered with the SEC nor listed on an exchange. Therefore, the shares will be somewhat illiquid.

Tracy doesn't expect a profitable month until the bank has been open for a year-and-a-half. The initial losses should be recouped by the third year, after which earnings are projected to grow consistently.

"You're opening up with a full staff," says Tracy. "The labor costs, the rent, the cost to process your accounts - that starts on day one. Income doesn't start necessarily.

"The quicker you get to profitability is going to be based more on your loan structure and how well you deal with getting loans on the books. That's the primary income source for banks, and mostly commercial loans."

Even when the bank gets into the black, Stout tells the golf club audience, earnings will be plowed back into signing up new customers. There won't be dividends for a while. "In the long term," he says, "that may not be what is ultimately best for the stockholder."

Tracy promises to run a tight ship. Any office function that doesn't bring in new business will be outsourced. "Everybody's selling," Stout says Tracy has told him. "I need everybody selling."

Through the wringer

Along with selling investors on the stock, the South Shore bank organizers have to satisfy regulators.

On paper, the bank board looks impressive. Among the directors are: Jack P. Sizemore Jr., 56, a fourth-generation Floridian from a Plant City family of strawberry growers; Tampa native Glenda L. Spencer, 53, who served on the board of the last community bank to serve south Hillsborough; and physician George R. Greenwell, 78, founder of the Brandon Swim & Tennis Club.

The background checks on new bank directors are extensive, according to Richard Hunt. Since the South Shore bank application has received conditional state approval, the checks on its directors have probably come back clean.

Hunt, whose small Hyde Park firm has completed initial capitalizations for 11 Florida financial institutions since 1999, says he has not always been as lucky with background investigations as he appears to be with South Shore Community Bank.

"We've had people, interesting enough, who forget that they spent two years in prison," says Hunt.

There are closer calls to make on each director's application for background approval. Hunt advises clients to err on the side of disclosure. "If you went to the University of Florida for three years, don't put down that you graduated," he says.

The most frequent stumbling block is a past criminal charge that a director failed to reveal because the records were sealed years ago, says Hunt. Bank regulators have access to all arrest records, he says, including those that were expunged from public view.

What are the disqualifiers? The big ones are felony convictions and tax liens. Hunt seldom has seen anybody succeed with regulators at explaining away the latter. Civil fraud allegations or past involvement with a failed financial institution also don't help an applicant.

Surprisingly, personal bankruptcy liquidation doesn't necessarily knock a director out of the running, if the discharge of debts was more than 10 years before.

Stout says he looked for directors who would put up money, spend hours in tedious organizational meetings, and undergo the regulatory scrutiny - all for the right reasons.

"We talked to a number of people and it became fairly evident fairly quickly that it was a status issue," says Stout. "I'm not embarrassed to say it's kind of cool, chairman of the board of a bank. That's not too bad. But that's not why I'm doing this."

Local need

The directors firmly believe south Hillsborough - the South Shore area, so dubbed for its location on Tampa Bay - must have an independent bank attuned to the needs of local business and residents.

"There've been a lot of people who started banks with one goal in mind: Start it, grow it and flip it," Stout says. "That's not anywhere near where our intentions are. If this bank is an independent bank 15 years from now, it won't surprise me."

Earlier this month, South Shore Community Bank in organization announced that it had reached the $6 million mark toward the state's $8 million minimum capitalization requirement. Stout would like to get to $10 million, which is all the would-be bank officials have said they will accept.

Thus far, Stout's group is raising capital mostly from family, friends and neighbors. "Ideally, we'd like to have our stock sold to local investors," says Tracy. "The institutional investor is certainly not going to - I mean, they might send you a CD. But, for the most part, they're an institutional investor."

Once the pool of capital gets to $8 million, Stout says the mutual funds and other institutional investors should move in and rapidly push the total up to $10 million. Stout says fund managers hold off until the last minute because they don't like to tie up their cash in the escrow fund of a de novo bank that is perhaps years away from profitability.

More than likely by September, the bank will have all of its capital, its government approvals and be ready to open in a tiny 2,400-square foot office on U.S. Highway 41 in Apollo Beach.

Then it will be time to find out whether South Shore residents prefer a homegrown community bank to Bank of America, SunTrust and Fifth Third, all of which have opened branches in the formerly sleepy Ruskin-Apollo Beach area. "If we don't deliver, guess whose egg is on whose face," Stout says. "We'll all look like fools."

But Tracy is pretty confident about South Shore Community Bank. "When the larger regionals start putting in offices," he says, "that's a pretty good indication that they sense that there is something happening."

SOUTH SHORE COMMUNITY BANK

Year-end projections for: Year one Year two Year three

Deposits $21,000,000 $45,000,000 $73,000,000

Total assets $27,732,370 $51,863,809 $81,047,154

Net interest income $508,276 $1,466,760 $2,717,052

Net income/loss -$675,374 $118,017 $1,163,552

Source: Florida Office of Financial Regulation