Bank Blues

Bank Blues

BANKING TRENDS by Mark Gordon | Managing Editor

Non-performing loans on the books of Gulf Coast community banks have topped half-a-billion dollars. What's a banker to do?

Words like bloody, painful and scary are as common nowadays in the executive offices of Gulf Coast banks as 'just sign here' was in 2004 and 2005. Banks are clearly feeling the effects of the economic downturn, both locally and nationally.

And nowhere is that more evident than in a bank's non-performing loan ratios - the amount of loans a bank holds that are at least 90 days past due. "It's a very tough market right now," says Kevin Hale, president and chief executive officer of Bradenton-based First Priority Bank, referring to the annual increase in non-performing loans seen in banks from Clearwater to Immokalee. "It's a real large problem out there."

Hale would know. The former head of the $9 billion Florida division of Fifth-Third Bank was brought in to First Priority in February partially to clean up the bank's non-current loan portfolio. And there's a lot to clean up. At the end of 2006, just 0.75% of First Priority's loans, about $1.4 million out of $189.7 million, were considered underperforming, according to Federal Deposit Insurance Corp. data. But by the end of 2007, the amount of underperforming loans at First Priority had jumped to 16.66% of the total loans, to $33.7 million out of $202.5 million.

Bloody, painful and scary stuff indeed.

Hale can take comfort in having lots of company. According to a Review analysis of FDIC data, three other Gulf-Coast based banks were holding a double-digit percentage rate of non-performing loans to total loans at the end of 2007. Those banks - Naples-based First Florida Bank, Immokalee-based Florida Community Bank and Marco Island-based Marco Community Bank - were some of the fastest growing on the Gulf Coast during the housing boom earlier this decade.

And nearly a dozen other Gulf Coast banks reported a 'bad-to-good' loan rate of at least 3% at the end of last year. "We're all kind of in the same boat right now," says Bill Short, president and CEO of Clearwater-based Old Harbor Bank, a six-branch, $230 million asset institution. Going into 2008, Old Harbor reported that 4.72%, or $8 million of its $170.1 million loan portfolio, was of the non-performing variety, up from just 0.2%, or $257,000 of its $131.4 million loan portfolio at the end of 2006.

The figures for many banks changed significantly in one year. For example, at the end of 2006, according to FDIC data, only two of 70 Gulf Coast-based community banks had a percentage of underperforming loans to performing loans that was greater than 3%, with the highest rate being 5.95%. More than half of the banks had a percentage under 1% and a full 18 banks, all of which had at least $35 million in total loans, reported flat-out no underperforming loans at the end of 2006.

In raw dollars, the numbers are just as staggering: The 15 Gulf Coast-based banks with the highest percentages of non-performing loans to overall loans at the end of 2007 had a combined total of $394.5 million in non-current loans, the FDIC data shows. Those same 15 banks, three of which were 2006 or 2007 startups, cumulatively held $76.5 million in non-current loans at the end of the 2006.

Watch list

It's not only Gulf Coast bankers who are paying close attention to the situation. The FDIC issued two statements last month proving the problem is nationwide.

In one statement, the FDIC announced it was adding 11 banks to its "problem institution" list, a database of banks under tighter regulatory scrutiny due to potential loan and capital-shortage problems. The list totaled 76 banks at the end of 2007, compared to 65 three months earlier.

While the agency never publicly releases the names of the banks on its watch list so as to protect the institutions from customer runs, some observers are pretty sure Florida is represented on the list, in spirit and reality.

"The high-growth states are always the worst," says Ben Bishop, chairman of Jacksonville-based investment banking analyst firm Allen C. Ewing & Co. "You can almost count on Florida being part of it."

And on March 17, the FDIC issued a letter to banks nationwide that could have added a subhead titled "Dear Florida Banker." The letter "re-emphasized the importance of strong capital and loan loss allowance levels...for institutions with significant concentrations of commercial real estate loans and construction and development loans," according to an FDIC statement.

Of course, the boom years of construction and real estate development wouldn't have been as booming without banks loaning money to spur the projects along. And on the flip side, no Gulf Coast-based community bank would have been able to grow its assets or loan portfolio at any meaningful level without having some involvement in loaning money to construction or development companies.

In looking at the non-performing loans problem from a statewide perspective, Bishop says bigger is definitely better. That's simply because a bank with more resources, both in terms of personnel and capital, has more chances to correct, or at least attempt to correct, the problems.

Still, Bishop isn't optimistic any of the banks will see a quick end to the problems. "Community banks all across the state will suffer in 2008," says Bishop. "Most banks will reach into their reserves or increase their reserves until at least 2009."

'A different mind'

While many Gulf Coast bankers informally polled think 2009 is the earliest the situation will turn around, that doesn't mean bank executives plan to spend the next eight months just waiting around for things to get better.

For example, Hale has hired two credit officers who specialize in non-performing loans. "It really takes a different mind to be able to handle the non-performing assets," Hale says.

Both Hale and Short, with Clearwater-based Old Harbor Bank, say they are attempting to build a virtual firewall that can separate good loans from bad loans, so the bank's employees and customers can have a sense of moving on, even if the bank technically isn't able to do that just yet.

"We're not deviating from our overall strategy," says Short, adding that the bank's primary goal is to still grow its assets and deposits.

Hale, meanwhile, is considering a solution most community banks have stayed away from during past downturns: Selling off underperforming loans to non-bank financial institutions that specialize in recouping money from sour loans. The Debt Exchange, a Boston-based firm, is one of the largest companies in the industry and although no deal is imminent, its representatives recently reached out to First Priority officials.

Community banks have been hesitant to sell off non-performing loans for sheer price reasons, as the market rate is usually so low it makes more sense for a bank to hang on to the loans and try and get the money back in-house. Some rates are as low as 50 cents on the dollar, says Immokalee-based Florida Community Bank president Stephen Price, who says he gets two or three calls a day from firms looking to buy the bank's loans.

Adds Short: "I've yet to see anything out there that's a good deal for me or the borrower."

Hale and potentially other bankers that go the sell-off route are undergoing a time-cost comparison when making a decision. That is, the longer a non-performing loan both stays on the books and remains non-performing, the tougher it is for the entire bank to make a clean turnaround.

"Time is the biggest factor we have to deal with," says Hale. "Time is our biggest enemy."

'Low character' loans

Immokalee-based Florida Community Bank might have finished third place in a ranking of 85 Gulf Coast community banks, but president and chief executive officer Stephen Price isn't celebrating his bronze medal. Price would actually rather celebrate not being on the list at all, which is comprised of the banks with highest percentages of non-performing loans to overall loans in 2007.

Florida Community Bank reported $739.5 million in overall loans last year, with $105.8 million of those loans, 14.31%, being classified as non-performing, or at least 90 days past due, according to Federal Deposit Insurance Corp. data. "That is an extremely high number," says Price.

In past downturns, Price, a 35-year banking veteran, says the solutions were usually some combination of hard work, creativity and time for the market to correct itself. This time though, Price sees two major problems, one of which is that like other Gulf Coast bankers, this market is just about the worse he's ever seen.

But compounding that, says Price, is what he considers a parade of "low-character" borrowers who have the money to repay the loan but decide not to, since the value of the land, home or building will be worth less than the value of the loan, courtesy of the slumping housing market. Price says he hears other banks are reporting similar problems, in addition to Florida Community, which has customers from Naples through Sarasota.

"We are seeing customer after customer after customer who are saying, 'I'm underwater on this thing, so I'm going to let the bank own it,'" says Price. "The character of the borrower has never been at a level as low as it is now."

REVIEW SUMMARY

Industry. Banking

Trend. Many Gulf Coast community banks have reported large increases in the rate of non-performing loans to overall loans.

Key. Some bankers and banking analysts predict it could be 2009 before the problem begins to turnaround.