Home Base

Home Base

BANKING by Dave Szymanski | Tampa Bay Editor

When First National Bank of Pennsylvania bought Seminole Bank in 1998, former Seminole employees organized First Home Bank, another community bank in Seminole.

First Home Bank in Seminole, which has been around for nine years, has no plans for more branches, other than its offices in Seminole and Pinellas Park.

There's also no big, online, technology campaign. Instead, the community bank, which ranks fifth in return on equity and assets on the Gulf Coast, is happy to pursue its role as a community bank for small businesses, entrepreneurs and consumers in Pinellas County and beyond.

It's the kind of place, that if you're a small business owner or an entrepreneur, you can directly call CEO Jeff Forbes or President Larry Cunningham, both St. Petersburg natives, and they'll pick up their own telephone. Or they'll come out to your office to fill out loan paperwork.

"People do business with people," Cunningham says. "We want to get to know them and want them to know us."

Some small businesses and wealthy investors prefer dealing with smaller community banks because they may have a better understanding of their business and they may share social ties, notes Darren Pierce, director of community banking at First Research Inc.

"Wealthy individuals can often get better service from smaller banks than larger ones," Pierce says.

First Bank was born in 1999 after First National Bank of Pennsylvania bought Seminole Bank in 1998.

"Half the board wanted to sell out, half wanted to keep it going," says Forbes, former CEO of Seminole Bank. "So we formed this one."

Joining Forbes were other ex-Seminole employees, including Cunningham.

Unusual structure

Everyone is familiar with the cycle of banks. Large banks grow larger and buy smaller banks to gain deposits and market share. People create new smaller banks. Large banks buy them. The cycle continues.

While First Bank is not immune to being bought, it does have a different legal wrinkle. It was formed as a sub S corporation, which is unique in banking. Historically, banks are C corporations.

The difference is in IRS tax treatment. Under a C corporation, the bank itself is taxed on the bank's earnings, and the individual owners are taxed only on the amount of dividends the bank pays to the shareholders (This is sometimes referred to as double taxation.).

In an S corporation, the owners pay (all) the taxes on the bank's earnings, so that the earnings are only taxed once. The IRS requires organizations wishing to elect the "small business corporation" to meet four IRS requirements.

The bottom line: a sub S corporation allows earnings to go directly to shareholders without the corporation being taxed. This structure means that unlike C corporations, shareholders are rewarded in other ways, other than through sale of the bank.

First Home has 26 shareholders and a seven-member board.

"We've enjoyed our sub-S status," Cunningham says. "It does set us apart. Our corporation is run more as a business."

How does First Home thrive in a competitive banking market, with giant out-of-town banks? Its strategy is simple: Take a business approach. Hire good people. Watch costs. Do business with people you know and build your balance sheet. Your income statement will take care of itself.

There is a trade off between growth and earnings and First Home's growth is not as spectacular as others in the community-banking field. But it is happy to slowly build from its base in Pinellas County, catering to entrepreneurs and small businesses, which make up the bulk of its loan portfolio.

"Our focus is to run a well-run company," Cunningham says.

Keeping it simple

Forbes follows a banking philosophy his CPA friend Ed Hacker gave him: "Banking is not a difficult business. It's not simple, but not difficult." He's based his career on that.

"We keep things simple," Forbes says. "That allows us not only to understand the structure, but to keep costs down."

"This industry is not a difficult industry," Forbes adds. "You take money in and lend it out."

As banks paid more attention to net-interest margins (the difference between what banks pay depositors vs. what they get from loan portfolios, also known as "the spread"), some began to focus more on fees in recent years. That's what got some investment banks in trouble, Forbes says.

"They became so fee oriented, they didn't know what they were doing," he says.

First Home offers checking and savings accounts and car loans, but it is limiting its online offerings.

"Banks are offering too much online," Forbes says. "They area taking risks they shouldn't take. We won't do it. We keep it simple. It works for us."

Instead, First Home focuses on asset quality and knowing its borrowers, what Forbes calls a Banking 101 principle.

"The people in the banking industry are a strange breed," Forbes says. "Savings and CDs are liabilities. Our assets are loans. The banking industry is backward."

Forbes and Cunningham work on establishing relationships with small business owners so they can make loans to them. They practice the sunset law: If someone calls, get back to them before sunset, even if you don't have an answer.

About 65% of its loan portfolio is with small businesses. It has about $85 million in deposits and $100 million in assets.

Forbes' vision for First Home is staying with the basics.

"As a CEO I want to surround myself with good people, watch my costs and take care of the balance," he says. "It's amazing how smooth things run after that. That is not easy to do."

Forbes knows there's a tradeoff between growth and earnings (high return on assets and return on equity), and he is comfortable with that.

"There are costs involved with growth, especially rapid growth," he says. "We are taking a slower growth path because of earnings. And you can control your asset quality. Some institutions have lower earnings because they've chosen the growth path. We can attract sufficient business for our growth plans."

REVIEW SUMMARY

Company: First Home Bank

Industry: Banking

Key: Stay focused and keep it simple.