Island Fever

Island Fever

BANKING by Jean Gruss | Editor/Lee-Collier

A group of influential Naples investors is buying a small bank in Marco Island that it will use to expand into the rest of Southwest Florida. Recent bad loans won't scuttle the deal.

A small bank holding company on Marco Island has been getting a lot of attention lately, and for good reason.

A group of investors led by the influential Barron Collier and Lutgert families are buying a controlling stake in Marco Community Bancorp, a small community bank-holding company on the island, for about $23.2 million.

They plan to use the holding company to launch an assault on Southwest Florida in a move that has rival local bankers on guard. "They need to watch us," chuckles Richard Storm Jr., Marco Community's chairman and chief executive officer. "When we get new treads on our sneakers, we'll be off and running."

New treads will include a $10 million preferred-stock offering, not to mention access to the broad connections and business interests of the new investors. Barron Collier Co., one branch of the Collier family whose county bears their name, is developing the new town of Ave Maria in the eastern part of Collier with Domino's Pizza founder Tom Monaghan. The Lutgerts are residential and commercial developers known for their tony beachfront development in Naples called Park Shore, among numerous other projects.

But before the bank can sprint ahead, it has to untie regulators' iron shoes. Federal and state banking authorities recently forced Marco Community to categorize about 10% of its loans as unlikely to pay interest, or "non-accrual" in banking lingo. Charge-offs have pushed the bank's net operating income to a loss of $2.7 million so far this year.

The bad loans won't scuttle the acquisition, says Richard Storm Jr., the bank's chairman and current largest shareholder. Storm took the reins of chief executive officer a few weeks ago as regulators singled out problem loans.

But Storm, 65, is a banking veteran with more than 30 years of experience in the industry. He was chairman and CEO of Citizens Community Bancorp until it was sold in April 2001 to F.N.B. Corp. F.N.B. later spun off its Florida operations under the name First National Bankshares of Florida, which was eventually acquired by Fifth Third Bank. At the time of Fifth Third's acquisition, Naples-based First National had $5.3 billion in assets, $3.7 billion in deposits and 77 offices stretching from Orlando to Tampa, Sarasota, Fort Myers and Naples.

Meanwhile, Kevin Hale and Michael Morris are two banking veterans of First National who are among the Marco bank's new investors. At First National, Hale was president and chief operating officer and Morris was president and CEO of the bank's wealth-management arm.

The combination of deep-pocketed investors and the experience of bankers such as Hale and Morris are surely going to alter the banking landscape of Southwest Florida. Rival bankers, already struggling with the real estate downturn and shrinking margins, now have to contend with a powerful new competitor.

Still, the prospect of rapid growth is tempered by the fact that the residential downturn is now leading to a commercial slowdown. Taxable sales have fallen in categories such as autos and consumer durables and commercial real estate brokers are warning about rising vacancies. In addition, the banking sector is extremely competitive. Today, there are 36 different banks with deposits in Collier County, according to the Federal Deposit Insurance Corp. Marco Community has 1.31% market share of deposits, a fraction of competitors' such as Fifth Third (17.53%), Orion Bank (9.58%) and Florida Community Bank (5.18%).

A serious presence in Naples

Once Marco Community gets its regulatory and lending problems behind it and the acquisition is concluded, Storm says the bank plans "a serious presence in Naples" by the time the busy winter season begins.

Storm is reluctant to outline the details of the assault on Naples, suppressing a smile when asked whether it will form a new bank under the Marco Community Bancorp holding company to target that market. A name change is under consideration, he concedes.

"Commercial real estate will be a focus," says Storm. Like most community banks, the company will offer real estate development and small business loans.

More important, the bank will have access to the broad connections of the Barron Collier and Lutgert families to make loans. Both families have their hands in dozens of real estate projects ranging from residential communities to shopping centers and offices. Their investments branch out to fields such as insurance, financial services and technology.

But it isn't just the lending side that will benefit, Storm says. The bank likely will see its deposit base swell as the Barron Collier and Lutgert families funnel their business deposits through the institution. For example, Lutgert's real estate brokerage, Premier Properties, has 500 real estate agents who generate millions of dollars in sales.

Meanwhile, Marco Community has three bankers in Fort Myers who generate loans. It's a small operation that might grow significantly, Storm says. "There's plenty of business up there," he says.

Storm is confident the bank can attract talented bankers to grow in Naples and Fort Myers. He says he's got "a plate full of people" that has called him about jobs. "There are a lot of unhappy lenders out there," he says.

Corned beef at the Hilton

The deal to sell a controlling stake to new investors happened over a corned beef sandwich at the Marco Hilton.

In October 2006, Storm got a phone call from Hale who told him he wanted to talk. Storm says he refused to even meet with him for lunch. "We were not for sale," Storm says.

Then in January, Hale called Storm back and told him investors would include the Barron Collier and Lutgert families. Those names got Storm's attention. "I said OK," Storm says. "We wanted to control our destiny, but then we saw their networking and resources."

So Storm and Hale hatched a deal over a corned beef sandwich they split at the Hilton Hotel on Marco Island. Hale's agreement not to compete with Fifth Third expires in January, Storm notes.

The deal, announced May 15, involves a stock sale by the bank holding company to the Barron Collier and Lutgert families, as well as other individuals. The company will sell about 3.6 million shares at $6.50 each, raising nearly $23.2 million. Current shareholders will receive a cash dividend of $6.50 per share. The sale of the shares will result in the new investor group having a controlling interest in the company.

Of the stock sale, about $20.6 million will be used to fund the $6.50-per-share dividend and the remaining $2.6 million will be retained to support the bank's future growth. What's more, the deal allows the company to increase the number of shares to 24 million, up from 9 million today, and that gives it the flexibility to raise millions of dollars in capital. Currently, the company has about 3.2 million shares outstanding and nearly 3.6 million shares will be distributed to the new investors.

According to a June proxy filing, Storm is the company's largest single shareholder with 13% of the stock. He is a beneficial owner of 412,414 shares, which would entitle him to a $2.68 million dividend payout under the deal.

Because of the problem loans the bank has had to charge off, the deal is likely going to be restructured before it closes. The agreement requires the company have $21.5 million in stockholders' equity at closing, roughly $1 million more than it had at the end of June.

But Storm isn't worried. "We just approved a $10 million preferred class of stock," he says. "Cash is king."

Cleaning up problem loans

On July 16, Marco Community had to reclassify some loans following exams with federal and state banking regulators. Specifically, the bank had purchased short-term loans to creditworthy borrowers so they could acquire and renovate homes in Duval and Hillsborough counties.

In a filing detailing the problem loans, the company says: "Due to liquidity and pricing weakness in those markets, as well as the financial deterioration of the loans' servicer, the bank has further concluded that the likelihood of full repayment of those loans is unlikely."

The bank has $12 million in those loans after charging off $3.5 million. In addition, the bank has charged off $1.3 million in other loans. As of June 30, the bank reported $125.8 million in net loans and leases and $162.1 million in total assets.

Storm's immediate task is to find ways to mitigate the damage from soured residential loans by selling them, arranging for refinancing or foreclosing on the borrowers. "I think this will be a transition period," Storm says. "I'm not overly concerned. That's why I'm here."

Marco investors

Marco Community Bancorp is selling a controlling stake to a group of investors led by the influential Barron Collier and Lutgert families. Here is the list of acquirers, the number of shares they're buying and the value based on $6.50 a share. The value is likely to change if the agreement is altered to reflect recent losses.

Buyer # shares $ value

Barron Collier Comm. 1,670,000 $10.9 million

Scott Lutgert 950,122 $6.2 million

Simone Lutgert 153,846 $1 million

Premier Insurance LLC 153,846 $1 million

Kevin Hale 153,846 $1 million

Michael Morris 153,846 $1 million

Paul Marinelli 153,846 $1 million

Ned Lautenbach 76,923 $500,000

Erwin Greenberg 38,462 $250,000

Paul Belfore 30,769 $200,000

John Suddeth 30,769 $200,000

BY THE NUMBERS

MARCO COMMUNITY BANK

(Dollars in thousands)

ASSETS AND LIABILITIES 6/30/06 6/30/07 %change

Total assets 156,184 162,080 4%

Net loans and leases 125,167 125,797 1%

Total liabilities 140,715 146,511 4%

Equity capital 15,469 15,569 1%

Noncurrent loans and leases 863 14,792 1,614%

Average assets, year-to-date 161,743 163,497 1%

Insider loans 0 0

Tier 1 (core) capital 15,469 15,569 1%

INCOME AND EXPENSES YTD 6/30/06 YTD 6/30/07 %change

Total interest income 6,018 6,015 0.05%

Total interest expense 2,342 2,977 27%

Net interest income 3,676 3,038 ?17%

Provision for loan and lease losses 348 5,295 1,422%

Total noninterest income 143 123 ?14%

Total noninterest expense 1,742 2,232 28%

Salaries and employee benefits 941 1,278 36%

Pre-tax net operating income 1,729 ?4,366

Net income 1,079 ?2,723

PERFORMANCE RATIOS YTD 6/30/06 YTD 6/30/07

Net interest margin 4.74% 3.92%

Return on assets 1.33% ?3.33%

Return on equity 14.64% ?32.36%

Efficiency ratio 45.61% 70.61%

Noncurrent assets plus other real estate owned to assets 0.55% 10.48%

Core capital (leverage) ratio 9.36% 9.24%

Tier 1 risk-based capital 10.80% 12.05%

Total risk-based capital ratio 11.83% 13.31%

Source: Federal Deposit Insurance Corp.

REVIEW SUMMARY

Industry. Banking

Company. Marco Community Bancorp, Inc.

Key. Powerful investors will make a small community bank a major player in Southwest Florida.