Terrorism Hits the Banks

Terrorism Hits the Banks

By Jean Gruss

Editor/Lee-Collier

Ask Jerry Williams about the role banks should play fighting terrorism, and he'll preface his remarks with the patriotic thing to say: that banks are willing to do what they can to help the government. But then, Williams will tell you how the federal Bank Secrecy Act has forced every bank to hire new teams of employees and spend hundreds of thousands, sometimes millions, of dollars to act as Congress' anti-terrorism detectives. As the president-elect of the Florida Banker's Association, Williams will have reforming that legislation high on his agenda.

Williams, who is chairman, president and chief executive officer of Naples-based Orion Bancorp., spoke with Review editors Matt Walsh and Jean Gruss recently on topics ranging from the effects of the Bank Secrecy Act to the region's real estate market to the battle with credit unions and Orion's growing market share in Southwest Florida. Here's an edited transcript of their conversation:

Given the state of the real estate market, have regulators stepped up oversight of real estate lending any more so than in the last two or three years?

I don't think they've stepped it up. I think they always pay attention to that. I think it's a consistent analyzing of all banks' lending practices across the board. I haven't seen any loosening of those practices with our bank or any other banks that we deal with.

They haven't shown any signs that they're being a little more vigilant in this hot real estate market?

I think they have constant vigilance. I've never seen them let up. That's because the majority of what banks do in Florida is real estate lending.

Did they learn something from the late '80s and early '90s busts?

All the regulators learned something. The FDIC (Federal Deposit Insurance Corp.) learned a lot, the OCC (Office of the Comptroller of the Currency), the state and all the bankers learned a lot. As a whole our industry is a lot smarter today than it's ever been.

What is the latest on the bankers' battle with the credit unions?

The banks are certainly not against the original intent of what a credit union is for. That's not what banks take issue with. Our industry takes issue with why a $1 billion credit union doesn't pay taxes. There are several billion-dollar credit unions - multibillion-dollar credit unions - that have gotten away from the original intent of that charter.

In what way?

They are certainly all getting into business lending. We've seen advertisements against our industry, saying credit unions are better than a bank. Well, they're better than a bank because they don't pay our 38% tax rate. All the banks are asking for is to level the playing field. We will compete with anyone, anywhere. The issue is it's unfair competition.

Is that an issue for Tallahassee or Washington?

It's a Washington issue. I believe that the FBA is making some progress. You're starting to hear some very prominent Washington people talking about having to look into this, having to address this issue. (One proposal would be that) if you're over a certain size, $500 million or over, all of a sudden you become taxable.

Is something likely to happen this year, or next year?

I don't know. But I can tell you the FBA has constant pressure, the American Bankers Association has constant pressure, all the banking organizations are trying to fight that.

How big of a problem is it in Florida?

Depending on where you operate, it's a big problem. It would be the same as you having not-for-profit business papers. What's fair about that?

So the effect of them not paying tax, they can offer lower interest rates?

It's a huge competitive advantage. Once again, there's a 38% difference. That's a huge gap. Here's a quote from (FBA Chief Executive Officer) Alex Sanchez: Why should a $1 billion credit union pay less tax than a family of four?

Is there anything new that the FBA is involved with the Bank Secrecy Act? What does it mean in terms of the burden on banks, and particularly smaller banks?

Everyone needs to understand that the industry is all for fighting terrorists and doing our part in keeping us safe. That is not the issue. What we would like to have is to work with regulators and get clarity on those guidelines. I don't know that the Patriot Act is itself the problem, but it's certainly subject to a lot of interpretation by a lot of people. They're coming out with additional guidelines, and the examiners are going through additional training, but it certainly has been a tremendous burden on our industry for the past 18 months.

In what way?

The number of compliance individuals, the amount of money having to be spent on automated systems to track the hundreds of thousands - the millions - of transactions that banks do and trying to sort through that. For example, we have to file suspicious activity reports on individuals. The banks are supposed to do investigations of premises of peoples' businesses. If we have any type of suspicion that a customer has some sort of suspicious transaction, we have to have someone actually visit and observe that business to see whether we believe it to be indeed suspicious.

Has Orion had to do that?

Absolutely. Several people we had to do that with. I've heard from a lot of banks around our state that it's a tremendous burden.

How much cost has it added to your budget in a year?

Probably $1 million. In that department, we went from two people to nine. It is all expense.

You hear local governments complain about the Legislature enacting laws that are unfunded mandates. That's what this is?

Absolutely. Our industry wants to be helpful. We're just not in agreement right now on how that should be done. There's not a prescribed set of rules. And I believe the regulators work in that same boat. They want to be helpful, but they're unsure. What we are waiting on now is that they drafted close to 200 pages to clarify. That's the new BSA manual. I'm not sure how much clarity is going to be in there.

What percentage of banks in Florida do you think are under some sort of regulatory scrutiny for this?

I don't have any idea. But I can tell you everyone is feeling the pressure and the pain of complying.

Do you think Florida banks come under more scrutiny than other banks in the country because of their international exposure?

AmSouth got fined $50 million in Alabama.

Bank industry consolidation has been going on for over 20 years and there was talk years ago about how the number of banks in the United States would shrink by half over a decade. That doesn't seem to be happening.

No, it doesn't seem to be. I still believe there are close to 9,000 banks in the country.

What do you and the FBA expect in the next five years, any change?

No, we don't believe so. We still see larger institutions acquiring smaller institutions ... given there's a void, and our economy is healthy and continues to grow. I believe that's also why you have new banks popping up around the state of Florida. Competition is good.

Do you expect a new wave of very active consolidation sometime soon?

I think those things tend to come in waves. There may be a gap between sellers' expectations and buyers' on pricing, but I still think it's constant.

Does the state of the economy trigger acquisitions?

I don't know...but I would still guess if you were outside of the state of Florida and the economy wasn't performing well, to move forward, you'd need to move into a state that's performing better than yours. So even if Florida were to slow down, maybe, it's still probably better than most other places. You still got the baby boomers coming. I don't see a lot of people retiring up north and staying up north.

Short-term interest rates are rising, but long-term rates haven't risen correspondingly. How will that affect your bank's future profits if this trend continues?

That's a bigger threat. That is a bigger threat for institutions to maintain their financial stability. There's going to be continued pressure on margins. So if you have a lot of competition, continued pressure on margins makes that difficult. So, yes, our industry has to be prepared for that. It's not going to be as good as it has been in the past. It's tighter and everyone in the country is feeling that. It's an odd situation we're in right now.

Do you foresee that to be the case for some time?

From everything we hear and everything we are planning, we believe the Fed will continue to make at least a couple more moves and the long-term rates have not responded at all, so that places pressure on everyone.

What indicators would tell you the real estate market in Southwest Florida is starting to cool off?

I don't know that I would call it cooling off. I think it's still strong. I haven't seen an overheated market. I've seen more demand, actually, for what is out there. But with the pricing today, we're close to being there, and I would guess that we're probably going to settle down to an annual 5% to 7% increase. You can't go on having 35% annual increases in real estate prices. I think it's still going to be a stronger real estate market than other areas.

Have you had the amount of luxury condo building in Naples that we've had up here in Sarasota?

We have consistently had luxury condos built in our market. I think Sarasota had a lot of pent-up demand for luxury condos that they didn't have, and I believe Fort Myers was the same way. You don't have any high-rises on the river, and now all of a sudden, three years later, you've got six (in downtown Fort Myers). Now the city is trying to slow that down. But it's more pent-up demand from where nothing got done over a period of time.

What about the commercial real estate market?

From what I understand from the large commercial Realtors we have discussions with, the commercial market is very strong. There are a lot of buyers on the commercial side. There are a lot more buyers than there is product.

So are the demographics really driving this?

The amount of investment money that is attracted to this area, the retirees who are in this area, the stock market not being as robust - that shifted a lot of people into real estate. But one of the reasons that I say it's not a heated market is that we have seen projects that we felt, for whatever reason, would not be successful. If they were out of line in this market, they didn't work. I haven't seen poor projects be successful.

What's your strategy in Lee County?

Our team there is doing a great job. In Collier, I believe we are number four in that marketplace out of 32 banks. We expect to have the same type of success in Lee and Sarasota.

Does that suggest that you are starting to become more of a consumer bank?

Not really. Our deposits tend to lag the lending side. We're doing business with business people, so the most difficult transaction to do is to make someone a loan; the easiest thing to do is take their deposit. We want not only to take their deposits but also lend them money, so when we lead with lending them money, the deposits will follow. That's why we have the lag. That's why we also have generated a tremendous amount of deposits not having a branch on every corner. We don't have to have 18 offices in a market; we can have five. It's really a $1.5 billion private bank. We don't deal in high-transaction volumes.

You don't need to make acquisitions?

We haven't needed to. We have continued to grow at our compounded annual growth rate of 25% a year. We grew over $300 million in '04, we'll grow probably $350 million to $400 million in '05. At that rate of growth, it's hard to find an acquisition that makes sense, which would be accretive. Not that we're not looking.

So you are always looking?

Absolutely.

What's the grand scheme for Orion? What is Orion Bank going to be two years from now?

We will continue to increase our market share in Southwest Florida. We'll certainly look for other opportunities around the state. Two years from now, we will have been privately owned for 30 years. That's pretty unusual in the state of Florida. That separates us. We should be $2.5 billion to $3 billion in total assets by that time.

Are you going into Hillsborough or Pinellas?

Thinking about it.

Do you need to?

We don't need to. If someone were to call us tomorrow and say we've got a great group of people in Jacksonville that could generate the right type of business that we were looking for, would you consider Jacksonville? Absolutely. It's driven by the people. We can build offices in lots of places. But it is not about bricks and mortar. Can we get the right team with the right people in place? Because they're going to drive that market, just like Rich Hopper is driving our market in Sarasota. He's built that team. He's driving that marketplace. We can create the infrastructure and the model, but you've got to have the right people to execute that. We're just trying to create a place that attracts those types of people who want to do that.

What's on your to-do list as chairman of the FBA? What do you want to accomplish?

My planning session a couple of months ago was actually pretty simple. I think it is recognized that we have generally the best (state) bank association in the country. The staff does a phenomenal job. I thought it was more important and a harder thing for us to maintain that level of performance. We'll certainly tweak and make minor modifications. But there certainly aren't any major overhauls. I think a lot of the hard work has been done, from the consolidation of the two entities, which happened four or five years ago. It's worked extremely well. The community bankers working together with the large banks has been very effective. (Community Bankers of Florida and FBA merged in 1999). It has been so positive and we haven't seen any downside to that.

Last question. Were you the one who wanted the Beat Girls as entertainment at the upcoming FBA convention in Puerto Rico?

That was Lamar Roberts (president and CEO of First National Bank of Pasco, and current FBA president). I'm going to try to get the Rolling Stones. And I'd love a contribution from Gulf Coast Business Review; the FBA can't afford it.