Strategy Combo

Strategy Combo

banking strategy by Mark Gordon | Managing Editor

A slowing market means First State Bank's growth rate might drop as much as 10% this year, even as executives bank on a strategy that combines two methods. Says its new president: "We have to hustle."

The way Jed Wilkinson sees it, there's two ways a community bank can grow: Through opening new branches and hoping the deposits, assets and market share ultimately lead to profitability or through the numbers, finding the best customers to capitalize on net interest and other margins.

Make that three. Says Wilkinson, the head of First State Bank's six Gulf Coast branches: "We think we can do both."

Wilkinson is the chief executive, president and a director of Sarasota-based First State Financial Corp., the parent company of First State Bank. He took on the jobs in April, after former CEO Corey Coughlin left the firm to be the top executive for Tampa-based Florida Bank Group.

As it is, First State isn't failing, or even flailing. The bank has quietly been one of the top performers in the Sarasota and Pinellas markets for the past two years. And more recently, in the first quarter of 2007 compared to the 2006 first quarter, the bank was in the top 15 among all Gulf Coast-based community banks in net income, assets and return on equity.

The bank's assets were up 11% for the quarter, from $401.6 million to $447 million, and its net income was up 7%, from $1.22 million to $1.31 million.

"We have great confidence," says Wilkinson, "that we will continue to be a top performer in our peer group."

There are several reasons for his optimism. One, the bank reorganized its management structure earlier this year, eliminating some over-lapping work and easing up the chain of command. Also, Wilkinson, a past chairman of the St. Petersburg Chamber of Commerce, along with other top First State executives, remains steadfast in his beliefs that the Gulf Coast is still a great place to be in community banking - despite the increasing competition, the slumping real estate market and the national economic uncertainty.

Says Wilkinson: "It's still an island of opportunity in the community banking arena."

Squeezed margins

What's more, Wilkinson, who has been in banking for 37 years, says the bank's primary focus on producing the best possible returns for shareholders keeps staff focused. That focus isn't toward making the bank a sale target, Wilkinson says, but so it can eventually be big enough to become a buyer in Gulf Coast markets it's currently not in.

"Our strategy is to grow the bank," says Wilkinson, 59. "Our strategy is not to sell the bank."

Wilkinson recognizes some community bankers say that and then six months later the bank is sold to a regional institution seeking entry to Florida. Not First State Bank, says Wilkinson, offering proof in that the bank considers possible acquisition as a threat in its semi-annual strategy and planning sessions.

The executive says to cover the branches part of the two-pronged balanced growth strategy, he'd first like to see the bank move into neighboring counties, such as Manatee and Hillsborough. Next up would be to find areas surrounding those locations, in Charlotte, Hernando and Pasco counties.

Wilkinson is more coy about what banks First State would like to acquire, and when. The bank has hired a consultant to find the right fit, but he declined to elaborate on what the bank is considering. In the meantime, the bank plans to open four new branches in its current counties over the next 18 months: Openings in Largo and Clearwater are scheduled for later this year and new branches are planned for Venice and Sarasota next year.

More branches, though, mean more potential for loan problems, not just growth, a fact First State board chairman Thomas Wright is well area off. He says the bank's plan only works with a "belt-and-suspenders" approach to monitoring loans. "We will still be aggressive," Wright says, "but we won't do anything foolish."

Capturing customers

The other half of the growth equation comes through margins. That can be more difficult, Wilkinson concedes, as following and predicting what will happen with federal interest rates is far from a precision operation.

Indeed, First State budgeted for a quarter-point decline in federal interest rates in both the second and third quarters in 2006. It didn't happen, and as a result, Wilkinson says, "it squeezed us."

With more unpredictability in the national economy and the state of the Gulf Coast real estate market, it makes sense, then, that Wilkinson's overall optimism is muted by realism. The banking landscape is tougher now than it was two years ago, or even last year, so growing will be tougher, too. He says a 15% growth rate in 2007 - no sure thing and a 10% drop from previous years - will be a significant accomplishment.

To prod the bank along, Wilkinson and the staff are introducing some new products and considering others. And last month, it moved a bulk of its back-office type departments into a 12,000-square-foot office it's leasing on Roosevelt Blvd. in St. Petersburg. Departments working out of that office now include loan, credit, audit, branch administration and training.

The bank is also teaming up with Infinex, a Meriden, Conn.-based firm that provides financial planning for community bank customers. First State is one of the few Gulf Coast banks to use the company, which is endorsed by the Florida Bankers Association, Wilkinson says.

The bank is also considering offering remote deposit capture, a federally approved system that equates digital check images with paper checks, allowing customers to scan paper checks and deposit them electronically.

First State employees will have to continue coming up with new products and ways to serve customers, says Wilkinson, in order to meet its ambitious goals. Nearly every other competing bank is doing that, too.

"We are all chasing the same business and there is a limited amount of deals right now," Wilkinson says. "We have to roll up our sleeves and hustle and make sure we are on top of every opportunity we can be."

REVIEW SUMMARY

Business. First State Financial Corp.

Industry. Banking

Key. Holding company for bank with branches in Sarasota and Pinellas counties seeks to grow by combining two strategies.

BY THE NUMBERS

First State Financial Corp.

(Dollars in thousands)

ASSETS AND LIBILITES YTD 3/31/06 YTD 3/31/07 %change

Total assets 401,656 446,948 11%

Net loans and leases 362,501 378,308 .04%

Total liabilities 356,394 397,626 12%

Equity capital 45,251 49,322 .09%

Noncurrent loans and leases 1,048 652 -38%

Average assets, year-to-date 387,163 450,195 16.2%

Insider loans 3,729 3,203 -14%

Tier 1 (core) capital 45,645 49,464 .08%

INCOME AND EXPENSES YTD 3/31/06 YTD 3/31/07 %change

Total interest income 6,967 8,717 25%

Total interest expense 2,655 4,087 53%

Net interest income 4,312 4,630 .07%

Provision for loan and lease losses 375 191 -49%

Total noninterest income 431 372 -13%

Total noninterest expense 2,429 2,727 12%

Salaries and employee benefits 1,483 1,779 20%

Pre-tax net operating income 1,939 2,084 .07%

Net income 1,228 1,316 .07%

PERFORMANCE RATIOS YTD 3/31/06 YTD 3/31/07

Net interest margin 4.64% 4.27%

Return on assets 1.27% 1.17%

Return on equity 10.95% 10.76%

Efficiency ratio 51.21% 54.52%

Noncurrent assets plus other real estate owned to assets 0.26% 0.15%

Core capital (leverage) ratio 11.97% 11.20%

Tier 1 risk-based capital 12.38% 12.59%

Total risk-based capital ratio 13.34% 13.75%

Source: FDIC

John "Jed"

Wilkinson

Jed Wilkinson, who was named president and the chief executive of First State Bank in April, had three job offers after graduating from the University of West Florida in Pensacola in 1970: New Orleans-based Shell Oil, Atlanta-based Burlington Industries or a small community bank near Winter Haven, not far from his hometown of Zephyrhills.

The lure of returning home - and the hesitancy to work for a corporate behemoth that promised to move him around the country for five years - led Wilkinson to take the bank job.

Wilkinson's banking career would later include stops at Southeast Bank and then South Trust Bank, where he worked from 1987 to 2002, in various executive positions. First State hired him in 2002, to run the bank's commercial lending unit.

Wilkinson's only break from banking was from 1979 to 1984, when, burned out from the career at 32 years old, he opened his own Ace Hardware store in Auburndale. He eventually returned to banking, partially because he realized that small business owners have an even faster burn-out rate, but also because he wanted to return to the core of community banking: Working with clients.

"I believe that banking is nothing more than a personal relationship," Wilkinson says. "I believe that all I have to do is sell Jed Wilkinson."

-Mark Gordon

Executive Tip

Jed Wilkinson, recently promoted to the top job at First Sate Financial Corp. and a 37-year banking executive, manages under the Big Five theory. In every priority list he creates, he keeps the tasks to no more than five. He encourages top executives at the bank to do the same, to help focus and eliminate distractions.