Avoiding Trouble

Avoiding Trouble

banking/update by Mark Gordon | Managing Editor

As Century Bank approaches $1 billion in assets, its strategy is changing to reflect the current banking market. Loan denials, for example, have doubled over the past year.

When John O'Neill was named the Review's 2004 Banker of the Year, statewide banking analysts and other observers praised his leadership in turning around underperforming Sarasota-based Century Bank as spectacular.

Looks like it's 2004 again - at least in terms of startling return and asset numbers. By nearly every statistical category, Century Bank was one of the Gulf Coast's top performers in 2006, and the top one in the Sarasota-Manatee market. Assets grew $208 million, from $611 million to $819 million.

That 34% growth, combined with another $30 million-plus it's already brought in this year, make it the biggest bank under $1 billion on the Gulf Coast, trailing only more established and well-known institutions such as St. Petersburg-based Raymond James and Naples-based Orion.

What's more, the bank's net income grew 33%, from $7.9 million to $10.59 million, the fifth most of all Gulf Coast banks in 2006. Return on assets grew slightly, from 1.43% to 1.51% and its return on equity grew 1.64%, from 21.22% to 22.86%. The 2006 returns on equity and assets were the highest of all Sarasota and Manatee-based banks.

But while the pure numbers are similar to the bank's success of the early part of the decade, the challenge facing O'Neill and his top executives is strikingly different: Back then, the focus was on how to squeeze the most out of the then-booming Florida real estate market.

In 2007, though, as O'Neill steers the bank toward becoming the seventh bank on the Gulf Coast to pass $1 billion in assets, the biggest daily task, he says, is "staying out of trouble." Adds O'Neill: "The quality of the borrowers has fallen dramatically."

Statewide growth

O'Neill's comments reflect what nearly all Gulf Coast bankers face in trying to grow while simultaneously avoiding the real estate-related loan problems that have hit other banks.

At Century, O'Neill considers his strategy to be plain vanilla, utilizing a combination of books-based decisions, such as reducing rates on some commercial loans to stay competitive, as well as expanding its presence throughout Florida. The bank is also expanding its product offerings and has a new internal software system.

In terms of locations, the bank recently opened commercial lending offices in Tampa, Jacksonville and Palm Beach. The latter location is part of a new focus on the Sunshine State's east coast, as the bank is also opening offices and lending centers in Pompano, Boca Raton and Delray Beach.

O'Neill, who moved to the Fort Lauderdale area from upstate New York in 1986 to work for what's now BankAtlantic, still spends some of his time on the east coast, where his family lives, as do several other Century executives. Barry Florescue, a Delray Beach-based businessman who bought the bank in 1988 and later served as chairman and chief executive officer, currently sits on the board and also lives on the east coast.

Century, though, isn't ignoring its Gulf Coast roots. The bank has seven branches between Bradenton and Venice, as well as two newer mini-branches in local retirement communities that O'Neill says illustrate how the bank intends to respond quickly to opportunities. The branches, which Century took over in late 2005, were abandoned by Bank of America.

"It's something that just fell in our laps," says O'Neill, who adds that the locations have surprisingly added some upscale clients to the customer base.

More scrutiny

With the new locations comes a focus on acquiring new clients - in what O'Neill calls the bank's 'staying out of trouble' phase.

This strategy is partially in response to guidelines released by federal regulators late last year calling for banks nationwide to monitor how much exposure the lending departments have to the construction, land development and commercial real estate markets. Specifically, the FDIC guidelines call for banks to hold construction and land development loans under 100% of overall equity capital and to keep commercial real estate loans under 300% of equity capital.

Century, like many fellow Gulf Coast banks, was high on both lists, according to an analysis of the banks and the guidelines conducted for the Review by Charlottesville, Va.-based research firm SNL Financial. The bank, based on assets and loan portfolios through 2006, was 305% over the construction and land development loan guidelines and 493% over the commercial real estate loan guidelines. Century was one of 46 banks - out of 82 based on the Gulf Coast - to be over both FDIC thresholds. (See 4/6/07 Review).

And that's despite Century's best efforts to avoid problems. O'Neill says the bank's loan denial ratio has skyrocketed the past year, going from approving 75% of all applications to approving 50%. The bank has also updated its system for accepting and denying loans, adding more levels of documents and credit score verifications.

In an effort to find more non-real estate lenders, the bank recently introduced some new commercial loan options.

While past loans have been geared toward land-rich but cash-poor developers, these products are for cash-management businesses, O'Neill says. That includes insurance offices, doctor practices and other small businesses.

REVIEW SUMMARY

Business. Century Bank, Sarasota

Industry. Banking

Key. The bank is changing its focus as it seeks business clients and lenders outside the real estate realm that has been a big reason for its success the past five years.

BY THE NUMBERS

Century Bank, A Federal Savings Bank

(Dollars in thousands)

ASSETS AND LIBILITES 12/31/05 12/31/06 %change

Total assets 611,110 819,143 34%

Net loans and leases 541,103 737,130 36%

Total liabilities 569,891 766,679 35%

Equity capital 41,219 52,464 27%

Noncurrent loans and leases 1,063 5,330 401%

Average assets, year-to-date 555,531 702,108 26%

Insider loans 200 165 -18%

Tier 1 (core) capital 40,681 51,927 28%

INCOME AND EXPENSES 12/31/05 12/31/06 %change

Total interest income 34,500 51,314 49%

Total interest expense 14,999 25,141 68%

Net interest income 19,501 26,173 34%

Provision for loan and lease losses 540 480 -11%

Total noninterest income 2,830 2,301 -19%

Total noninterest expense 9,943 11,567 16%

Salaries and employee benefits 6,386 7,578 19%

Pre-tax net operating income 11,848 16,427 39%

Net income 7,946 10,956 33%

PERFORMANCE RATIOS 12/31/05 12/31/06

Net interest margin 3.68% 3.89%

Return on assets 1.43% 1.51%

Return on equity 21.22% 22.86%

Efficiency ratio 44.53% 40.62%

Noncurrent assets plus other

real estate owned to assets 0.21% 0.66%

Core capital (leverage) ratio 6.66% 6.34%

Tier 1 risk-based capital 8.38% 8.12%

Total risk-based capital ratio 10.99% 10.16%

Source: FDIC