Cover Update: Facing the Challenge

Cover Update: Facing the Challenge

Michael McMullan is fond of reciting this mantra: "We like to make good loans."

You can put extra emphasis on good as the president and chief executive officer of Bank of Florida Corp. steers the eight-year-old Naples-based bank holding company through a challenging state economy in 2008.

McMullan says the bank company's strong underwriting has saved it from some of the missteps of its competitors. So far, the numbers bear him out as nonperforming loans and charge-offs have been minimal.

Like every other bank with a focus on the state, Bank of Florida's loan portfolio is laden with commercial real estate, construction and development loans. Investors have shied away from all publicly held banks with big exposure to Florida, including Bank of Florida whose stock recently was down nearly 40% (symbol BOFL, recent price $13).

"There are some challenges in Florida right now, but we'll get through them," McMullan says. Bank of Florida reported net income of $4.6 million for the first nine months of 2007, a 61% increase over the $2.9 million it earned in 2006.

Bank of Florida has $1.3 billion in assets spread among four subsidiaries: Bank of Florida – Southwest, Bank of Florida – Southeast, Bank of Florida Tampa Bay and Bank of Florida Trust Co. Each has its own charter and board of directors composed of local business executives. This gives the bank "real time views of what's going on in their markets," McMullan says. Meanwhile, the bank is efficient because all its back-office operations are located in Naples.

Bank of Florida has grown by expanding to new markets and making acquisitions, such as the opening of a new financial center in Pinellas County and the acquisition of Fort Myers-based Old Florida Bankshares in 2007. However, McMullan says the state of uncertainty in banking may make acquisitions less likely in 2008.

Bank of Florida's multitude of directors in each of the seven markets it serves are the eyes and ears of the bank. They can help the bank "find borrowers in tough times who have the wherewithal and character to make it through," McMullan says. "We know our borrowers more intimately than large backs because of our local viewpoint," he adds.

McMullan acknowledges that the bank is being "extremely cautious" lending in real estate development. Indeed, construction and development loans that are behind on payments have risen to 0.95% of loans in September from 0% in the same month in 2006, according to the bank's filings.

"The interesting dynamic here is that there's a lot of investor money looking for value opportunities in Florida," McMullan says, pointing to Morgan Stanley's recent acquisition of 11,000 residential lots from Lennar Corp. at a 60% discount.

Meanwhile, the bank has expanded its efforts to lend to entrepreneurs. Such commercial and industrial loans rose 35% in September to $84 million from $63 million in September 2006. It's also adding staff to expand its trust and money management subsidiary.

To make more loans, Bank of Florida is paying more for deposits. Competition from national banks such as Countrywide is keeping rates artificially high, McMullan says. That's shrinking margins at Bank of Florida as well as its competitors.

Still, McMullan's views mirror those of many of his peers: Florida's economy will go through a rough patch but will emerge stronger as the tsunami of Baby Boomers retires to Florida. "A lot of folks aren't going to buy until the bottom's been found," McMullan says. But surviving businesses will benefit when they do.

-Jean Gruss