Banking on the Future

Banking on the Future

Newer banks that aren't weighed

down by bad loans have an opportunity

to make better loans. Now the

economy needs to cooperate.

by Jean Gruss | Editor/Lee-Collier

It seems that not a day goes by without some bad news about the banking industry. Bank stocks are way down, their loans are souring, their losses mount and bail-outs are debated.

But there's a new crop of banks that might actually benefit from the chaos. Although they're not immune from an economic downturn, banks that have started operating in the last two years aren't weighed down by all the bad loans their competitors made during the boom times.

Bruce Schultz, the president and chief executive officer of Southwest Capital Bank in Fort Myers, doesn't gloat. But the bank he and a group of local investors started in July 2006 is grabbing loan business from longer-established banks that are struggling today.

Schultz is also finding niches such as health care, public works builders and export manufacturers where he can make good loans. The bank's holding company, Southwest Capital Bancshares, is ranked the 453rd largest company on the Gulf Coast.

But this isn't to say that banking is easy today. The economic downturn has forced the bank to push back the date it will achieve profitability by about one year, or the latter part of 2009 or early 2010. In the first quarter, the bank reported a net loss of $935,000 compared with a net loss of $622,000 in the first quarter of 2007, according to the Federal Deposit Insurance Corp.

Besides the painstaking process of finding customers with good credit, the bank has to pay relatively high interest rates to gather deposits. At its core, banking is a simple business: borrow money from depositors at a low interest rate and lend it out at a higher rate and pocket the difference after expenses.

But this "interest margin" is getting squeezed from depositors demanding more interest on their cash and from fewer creditworthy customers who play one bank off another in search of lower borrowing costs. "The squeeze is on right now," Schultz acknowledges.

But the situation is dire at older competing banks that lent freely during the boom. Besides pressure on interest margin, they have to set aside even more money to account for problem loans. Banks such as Southwest Capital Bank have zero bad loans and no foreclosures, giving it an edge.

Schultz says there are opportunities to restructure business loans made by rival financial institutions. These rivals will inevitably take a loss but don't want to own the collateral, giving Schultz an opportunity to step in. He's especially keen on businesses that own and use their own buildings.

Southwest Capital Bank is also financing buyers of commercial real estate who are starting to buy assets that have declined substantially in value. In some cases, these investors are buying assets at below replacement cost, which will give the lender the confidence they need that their customer will make it through the downturn. "This is a wealth-shift event," Schultz says.

Schultz has lived through and learned through these wealth-shift events before. He was a management trainee in the mid-1980s at Park Bank, which at the time was among the largest bank failures in Florida. The first loan file he reviewed listed the borrower's financial statements on a cocktail napkin. "It was a great experience on how not to do things," Schultz says.

Then, in the late 1980s and early 1990s, Schultz worked for SunTrust Bank in Sarasota where he sorted out commercial loans that went sour. Together with the Park Bank experience, Schultz learned to be a conservative banker.

"This is one of the few situations where it's exciting to be in banking," he laughs.

SUMMARY

Company. Southwest Capital Bank

Industry. Banking

Key. Newer banks can snag opportunities from older competitors saddled with bad loans.