Betting on a Winner

Betting on a Winner

banking by Jean Gruss | Editor/Lee-Collier

Two prominent Southwest Florida families are betting that TIB Financial will weather the storm battering the state's community banks. Will their investment pay off?

Lately, investors have been treating Florida community banks like the financial equivalent of nuclear waste.

But that hasn't stopped two well-known Southwest Florida families from betting millions of dollars that one bank holding company - Naples-based TIB Financial Corp.- can weather the financial storm.

One branch of the Collier family together with the Lutgert family recently announced plans to invest as much as $20.2 million in TIB Financial, parent company of TIB Bank, the fourth-largest Gulf Coast-based bank by assets.

If they're right, their bet could pay off handsomely. TIB's publicly traded stock is now trading near book value, a rare opportunity given that most Florida-based banks have traded from two to four times book value in recent years. By acquiring TIB stock at such a low valuation, the two families are buying the parent of TIB Bank and The Bank of Venice without much of a premium, something that was unheard of just a few years ago.

Before the investment by the Colliers and Lutgerts, TIB's largest single institutional shareholder was one that was selling the stock of the company last year. Securities filings show Chicago-based Banc Funds Co. sold 18% of its holdings in TIB last year and now owns 6% of the stock. Officials with Banc Funds couldn't be reached.

TIB's stock is cheap today for several reasons. Investors have sold off bank stocks as the recent financial and real estate crises unfolded. As a result, Florida-based banks have been treated especially harshly. For better or worse, real estate lending is the bread-and-butter business of Florida community banks and TIB is no exception. As of Dec. 31, 82% of the company's loans held for investment were secured by real estate.

TIB's overall loan growth was muted last year, its interest margins shrank and it lost money in 2007 because it had to account for potential loan losses and was forced to write down investment securities that lost value. No one knows whether the situation will improve soon, but TIB's recent annual report alerted investors of a $13.5-million commercial land-development loan in east Naples that soured in February because the undisclosed borrowers could no longer service the debt.

But TIB is in better shape than many of its rivals. The company's delinquent loans as a percentage of total loans trail its peers, according to Dec. 31 data compiled by the Federal Deposit Insurance Corp, suggesting TIB management was more conservative than some competitors. Its core capital ratio is double what the government requires and it also exceeds its peers, defined as Florida banks with assets between $1 and $10 billion. The company spent 2007 strengthening its underwriting criteria, which resulted in fewer loans to people who bought cars, for example.

To boost income from non-lending sources, TIB acquired Naples Capital Advisors for $1.33 million on Jan. 2, a money management firm that oversees $80 million in investments. It also is seeking approval to start a trust company as part of a new effort to provide private-banking services. Its purchase of the Bank of Venice in April 2007 gives it a springboard to expand into Sarasota County.

"They've got room to grow their market share," says Brad Boaz, chief financial officer for Barron Collier Cos., one of the new investors. Boaz says every Florida community bank has been affected by the real estate downturn, but he's confident in the eventual rebound. "We see that being worked out over the next couple of years," he says.

Certainly, the connections that Barron Collier Cos. and those of the Lutgert family will be invaluable to generate new business. Descendants of Collier County's namesake are developing projects such as Ave Maria, a new town in partnership with Domino's Pizza founder Tom Monaghan. Lutgert Cos. is a major real estate development firm that has built condos, residential communities and shopping centers all over Naples, sometimes partnering with the Colliers. Paul Marinelli, president and CEO of Barron Collier Cos., and Howard Gutman, president of Lutgert Cos., have both joined the TIB board.

News of the investment sent TIB stock (symbol TIBB) up 40% in the two weeks that followed, though it recently traded a few pennies below the $8.40 paid by the new investors. The two families on March 7 bought 1.2 million shares of TIB from the company at $8.40 per share, or $10.1 million. In addition, the two families received warrants that give them the right buy an additional 1.2 million shares at the same price at any time before March 7, 2011, potentially bringing their total investment to $20.2 million.

"They're getting in at a great time," says Michael Andrews, a bank analyst with SNL Financial in Charlottesville, Va. "If I didn't tell you where it was, you would say this bank looks pretty good."

Opportunity to diversify

The Colliers and Lutgerts have been scouting area banks in which to invest, both for diversification and as an opportunity to generate healthy returns. A $23.2-million deal to buy a controlling stake in Marco Community Bancorp fell apart last fall after bad loans surfaced and they couldn't agree on a new price.

In retrospect, the Colliers and Lutgerts are getting a better deal today. Although each family agreed not to acquire more than 9.9% of TIB, they're investors in a much bigger bank with $1.4 billion in assets that is likely to better withstand the current economic downturn than the smaller Marco bank-holding company.

"Prices were certainly higher than they are today," says Boaz. "Across the board, everyone has paid a price for the mortgage issues that have been out there."

While Boaz acknowledges that no one knows when this cycle will reach bottom, he says the downturn is a short-term phenomenon.

Boaz is in a position to know. The Colliers and Lutgerts have millions of dollars of residential and commercial development projects underway that will benefit from the eventual economic rebound. Fact is, immense wealth has been created in the past when investors made acquisitions and investments during hard times.

Boaz ticks off TIB's strengths and potential: It's been managed conservatively and has a strong capital base to weather the downturn, it's a publicly traded company that can raise money by selling more shares if needed, there's room for expansion up the coast and within existing markets, it has expanded into private banking and the management is seasoned. "We're very confident with the management," Boaz says.

Boaz says the new board members will be "hands on" and "very involved" in helping TIB grow. Marinelli and Boaz aren't banking novices; both men audited banks when they worked together at the Pete Marwick accounting firm in Tampa before they joined Barron Collier.

The time frame for expectations of returns is about five to 10 years during which time the goal is to help TIB grow three to five times its current size, Boaz says. "This [investment] was looking strategically to where we could add value," he says.

Managing the downturn

While the economic downturn will continue to impact TIB, it has a clear strategy to weather the storm. For one thing, the bank is diversifying its business to include private banking services such as money management and trust services, which it shunned in the past.

"They're creating new cash-generating businesses that can help sustain them given the probability of a longer-than-normal slump," says SNL's Andrews. "The market puts a premium on non-interest income," he adds.

Banks make money by borrowing from depositors at low rates and lending at a higher rate, resulting in interest income. Investors today reward banks that can supplement that with income not associated with lending, such as money management and trust services.

"The potential is very strong," says Stephen Gilhooly, TIB's executive vice president, treasurer and chief financial officer. He expects the firm's wealth management arm to be profitable within the next year to 18 months.

What's more, TIB plans to continue to grow, adding at least one or two branches per year to the 20 it already has from the Florida Keys to Venice. Branches are a source of sought-after deposits that are essential for future growth.

TIB, which got its start as The Islamorada Bank in 1974, built a franchise in the Keys that in the past has generated solid profits to finance its expansion into Southwest Florida. The Keys act as a sort of geographic competitive moat for TIB that will likely counterbalance the downturn in Southwest Florida.

Meanwhile, TIB has to manage any problem loans that crop up. Already, it tightened its lending criteria on its auto-lending business because of the downturn and that portfolio shrank 17% last year. Auto loans represented 11% of its total loan portfolio as of Dec. 31.

The bigger concern is the bank's portfolio of real estate loans held for investment, which represent about 82% of total loans. Of that amount, 67% are commercial real estate, 18% are for construction and development and 12% for residential real estate. The company recorded a net loss of $2.4 million in 2007 due in part to an additional $9.7 million provision for loan losses and write-downs of investment securities totaling $5.7 million.

It's hard to say when economic conditions will improve. "We're in a multi-year recovery process," says Gilhooly. "A bank can't be immune from its marketplace."

The key now is to help borrowers through this rough patch, dedicating employees to this task. So far, only "a handful" of commercial borrowers are problematic, Gilhooly says.

So far, problem loans have mostly been confined to land and development. But Gilhooly says the bank is also concerned about retail space as the amount of development has risen. Office space is another potential problem on the horizon as the residential downturn affects related businesses such as title companies and brokerages.

But banking will remain. "Banking doesn't go away just because the floor dropped out of real estate," says Andrews. For banks the size of TIB, the decision is either to grow or sell out to a larger entity. For now, TIB has settled for the former.

BY THE NUMBERS

TIB Financial Corp. (Dollars in thousands)

INCOME STATEMENT

(Dollars in thousands) YTD 12/31/06 YTD 12/31/07 Change

Interest and dividend income 85,234 94,741 11%

Interest expense 38,171 48,721 28%

Net interest income 47,063 46,020 ‑2%

Provision for loan losses 3,491 9,657 177%

Net interest income after

provision for loan losses 43,572 36,363 ‑17%

Noninterest income 6,275 1,362 ‑78%

Noninterest expense 35,833 41,921 17%

Income tax benefit ‑5,021 1,775

Net income 9,247 ‑2,421

BALANCE SHEET

12/31/06 12/31/07 Change

Total assets 1,319,093 1,444,739 10%

Investment securities 131,199 160,357 22%

Total loans 1,063,852 1,127,667 6%

Allowance for loan losses 9,581 14,973 56%

Deposits 1,029,457 1,049,958 2%

Shareholder's equity 85,862 96,240 12%

Source: Securities & Exchange Commission Form 10-K

REVIEW SUMMARY

Industry: Banking

Company: TIB Financial Corp.

Key: Florida banks are trading at such low valuations that investors are snapping up shares of those they believe will make it through the downturn.