No Gorillas

No Gorillas

BANKING ISSUE by Jean Gruss | Editor/Lee-Collier

Roy Hellwege, the president and CEO of Bank of Florida-Tampa Bay, held a contest for his board of directors last year.

The goal: bring in $16.5 million in deposits and keep a tally of which board member brought in the most money. The prize was a weekend party at the Ritz-Carlton in Naples. By the end of the year, the board had brought in $20 million in deposits and the winner was Chairman Edward Kaloust, who also is the CEO of Tampa-based Medi-Weight Loss Clinics.

The bank is a subsidiary of Bancshares of Florida, a Naples-based bank-holding company that plans to reach the $1 billion-in-assets mark next year by focusing on the banking needs of businesses and entrepreneurs. Bancshares' assets now total about $620 million.

The strategy behind the company's growth has been to create separate banks, each with its own board of directors, for the three markets it serves: the Tampa Bay region (Hillsborough and Pinellas counties), Southwest Florida (Collier and Lee) and Southeast Florida (Broward, Palm Beach and Miami-Dade). Bancshares President and Chief Executive Officer Michael McMullan says creating a separate local board for each bank has been key to the success because directors are actively involved in helping generate new business.

McMullan, 51, says the bank would not have grown as quickly if it had simply opened branches in Tampa or Fort Lauderdale. The Tampa bank board's contest to gather deposits was just one of many such efforts, he says. At the Ritz-Carlton party to celebrate the Tampa bank's efforts, directors from the bank's two other subsidiaries exchanged tips on how to bring in more business, McMullan says.

In addition, the bank established a trust subsidiary called Bank of Florida Trust Co. in 2000. This allowed the bank to cater to the wealth-management needs of its entrepreneur-borrowers, a service most community banks don't offer.

So far, the bank company's growth has been substantial. In the five years ending Dec. 31, total loans grew from $33 million to $488 million, a 71% compound annual growth rate. Total deposits grew at a compound annual rate of 65%, from $40 million to $495 million. The bank became profitable last year.

And Bancshares is about to get a lot bigger thanks to help from Wall Street. The company recently netted $58 million from the sale of stock in a secondary offering, which was underwritten by Raymond James, Allen & Co. and Ryan Beck. Bancshares (stock symbol: BOFL) plans to capitalize new subsidiary Bank of Florida-Palm Beach County with $10 million, boost capital at Bank of Florida-Tampa Bay with $8 million, use $6.3 million to pay for the cash portion of its recent purchase of Bristol Bank in Coral Gables and pay back $3 million of debt. It will have about $30 million left over for "discretionary use."

Although McMullan declines to be too specific about the company's plans for the $30 million, he says much of it will be used to boost the company's presence in the markets it already serves. For example, in Tampa Bay it plans to open a loan-production office in Pinellas County. It's also going to open a new office in Aventura to cover the Miami-Dade area. What's more, it plans to spend more money branding the bank with advertising and promotion. Although McMullan wouldn't rule out eventually entering new markets such as Sarasota, he says the focus now is on existing markets.

'A Naples flip?'

Bancshares Chairman and Naples commercial real estate broker Earl Frye recruited McMullan to start the bank in 1998. McMullan, who was NationsBank's manager of economic development for the state of Florida in Fort Lauderdale, says he was concerned the directors wanted to build the bank only to sell it after a few years.

"Is this a Naples flip?" McMullan recalls asking the founding board members. They assured him it wasn't.

So McMullan established Bank of Florida in Naples. Initially, the bank had no plans to expand outside Southwest Florida. But McMullan's Broward County business contacts urged him to replicate his efforts there. So with the board's blessing, McMullan established the bank holding company in 2001 and opened Bank of Florida-Fort Lauderdale. High-profile entrepreneurs joined the board, including Terry Stiles, chairman and CEO of the Fort Lauderdale construction company that bears his name and H. Wayne Huizenga Jr.

Although it was not going to be a "Naples flip," directors wanted liquidity for their investment. So in February 2003 the bank sold shares to the public and its stock started trading on the Nasdaq market at $10 per share. Although the stock price has more than doubled since then, 2003 was a tough year to go public considering the stock market had suffered three straight years of losses. McMullan is fond of showing a copy of the front page of the Los Angeles Times business section with this headline: "Florida Bank's IPO Offers Hope."

In addition to giving board members an opportunity to cash out, Wall Street provided access to capital to build the bank. What's more, McMullan says the bank uses the stock to recruit and retain employees. All employees have been granted stock options, he says. In addition to his salary and benefits totaling $341,238 in 2005, McMullan received 35,000 stock options last year potentially worth as much as $1.2 million.

McMullan says the board has sought to encourage widespread ownership so that no single director would have overwhelming influence on the board. Initially, he says, the board restricted the amount of stock any director could buy to 20,000 shares. "No gorilla on the board," McMullen says.

According to its recent proxy, Bancshares' largest director-shareholder is LaVonne Johnson, a retired county planner from Pennsylvania who has a home on Marco Island. She owns 3.61% of the company's common stock. Frye, the company chairman, owns 1.62%. Huizenga owns 0.77% and Stiles owns 2.86%. Bancshares' largest shareholder is Ashford Capital Management of Wilmington, Del., with 8.06%.

Build a big chassis

Including its most recent stock sale, Bancshares has raised capital six times to build three banks from scratch and a fourth soon in Palm Beach. "You've got to build a pretty big chassis," McMullan says.

Many of the back-office operations such as accounting and marketing are located in Naples and McMullan says they can now support a $3-billion bank-holding company. "We're not going to have to play catch-up," he says.

McMullan also says the company has greater operating leverage as it starts up new banks or acquires existing ones because each subsidiary's board and management can spend more time generating new business than worrying about the day-to-day operations.

Now that it has the capital it needs, the bank has the ability to pounce on a good opportunity. It recently acquired Bristol Bank, a $91-million asset bank in Coral Gables. Bancshares paid about $21 million in cash and stock for the bank, valuing the transaction at about 2 times book value, in line with recent bank acquisitions in Florida. The acquisition gives Bancshares a toehold in Miami-Dade County and McMullan estimates it saved the bank three years to build a similar size operation. For now, Bristol will operate as part of Bank of Florida-Fort Lauderdale.

Real estate and interest rates

When McMullan and his executive team traveled to Wall Street this spring to sell the secondary offering, investors peppered them with questions about how Florida could sustain its recent rapid growth.

For example, institutional investors wanted to know how the dwindling supply of affordable housing might affect the quality of life in Florida. "They said it's going to drill right down into our bank," McMullan says.

Of course, real estate is a hot topic among Florida bankers these days. As of December 31, 85% of the bank's loans were related to real estate. Of those, 37% were tied to commercial real estate, 29% were related to construction and 19% were related to single- and multi-family homes.

"There's no bubble in Florida now," McMullan says. "There's never been more demand and less supply; there's so much cash on the sidelines."

Meanwhile rising interest rates haven't hurt the bank's results, McMullan says. Banks earn money on what they call the spread, which is the difference between the interest they pay depositors and what they earn on the loans they make. Because half of Bancshares' loans are adjustable, McMullan says rising interest rates haven't hurt results. What's more, the bank has focused on gathering "core" deposits that are likely to remain with the bank a long time because of convenience and service rather than high yields. The bank's spread improved by a full percentage point over the past year, McMullan says.

In addition, the bank receives steady income from the fees its trust company charges. As the trust company grows, it could offset some of the interest-sensitive income. Bank of Florida Trust Co. grew assets to $390 million in 2005, up 93% over the previous year. Although the bank declined to reveal its fee structure, the trust company's pretax earnings were $173,000 in 2005 versus $53,000 in 2004.

By the Numbers

Bancshares of Florida

(Dollars in thousands)

Assets and liabilities 3/31/05 3/31/05 %Change

Total assets $463,476 $618,115 33%

Net loans and leases $357,745 $545,058 52%

Total liabilities $425,471 $565,516 33%

Total deposits $415,765 $540,332 30%

Equity capital $38,005 $52,599 38%

Noncurrent loans and leases $483 $45 ?91%

Average Assets, year-to-date $444,699 $598,159 35%

Insider loans $12,940 $23,831 84%

Tier 1 (core) capital $37,175 $50,628 36%

Income and expenses YTD 3/31/05 YTD 3/31/06 %Change

Total interest income $5,505 $9,936 80%

Total interest expense $1,871 $3,727 99%

Net interest income $3,634 $6,209 71%

Provision for loan and lease losses $296 $606 105%

Total noninterest income $342 $458 34%

Total noninterest expense $3,468 $4,858 40%

Salaries and employee benefits $1,232 $1,815 47%

Pre-tax net operating income $212 $1,203 467%

Net income $212 $743 250%

Performance Ratios YTD 3/31/05 YTD 3/31/06

Net interest margin 3.50% 4.44%

Return on assets 0.19% 0.50%

Return on equity 2.24% 5.75%

Efficiency ratio 86.97% 72.72%

Noncurrent assets plus other real estate owned to assets 0.10% 0.01%

Core capital (leverage) ratio 8.52% 8.25%

Tier 1 risk-based capital ratio 9.62% 8.25%

Total risk-based capital ratio 10.95% 10.81%

Source: FDIC