Long for Short

Befuddled glances were coming back to Tony Leo as fast as whiplash when he met with the board of a capital-starved Gulf Coast community bank earlier this fall.

Leo, standing before the directors of Englewood-based Peninsula Bank, was talking bank survival strategy. The board wanted to hear why it should make Leo its chief executive officer, a position it had been looking to fill since its longtime CEO and chairman Simon Portnoy retired in June.

A Sarasota resident who once ran the oversight and administration divisions of a $4 billion, 81-office bank in Pennsylvania, Leo came to the board as a highly recommended turnaround specialist. But there he was using words like growth plans, new customers, and future branding strategies — just as the $646 million asset bank was facing its greatest capital-shortage crisis ever.

Leo says he isn't oblivious to the bank's capital shortage, and he wasn't in October, either, when he met with the board. And more than one confused board member pressed Leo about the contradiction in talking about the future of the bank without solving the present.

But Leo's message then, as it is now, is that for Peninsula to succeed long-term it needs to survive the short-term by showing potential investors what it will do after it receives a capital injection.

Despite its initial doubts, the board ultimately agreed and hired Leo Oct. 28. His appointment will remain acting until it's approved by federal regulatory agencies; the Florida Office of Financial Regulation has preliminarily approved it.

Peninsula's challenges are critical. It recently entered into a consent decree with federal and state regulators, the new banking lingo for what was previously referred to as a cease-and-desist order. The decree has few surprises, focusing mostly on the bank's shortcomings in two major areas: the capital shortage and a sour loan portfolio.

“I think we are doing everything we can possibly do,” Leo says. “Clearly, we have a big hole to fill.”

It's not all bad news, however. The bank has a daily liquidity ratio greater than 20%, says Leo, and regulators normally consider any liquidity ratio over 20% satisfactory. The bank's daily liquidity position as of Oct. 31 was based partially on $55 million in Federal Reserve funds it can borrow and sell to other banks and another $130 million in bonds and securities it can sell if necessary.

“We are maintaining a very strong liquidity position,” says Leo, so the bank has enough cash on hand to prove to regulators — and customers — that it can survive the recession.

'Hand-in-hand'
Nonetheless, the bank is seeking as much as $40 million in capital to cover its loan issues, although Leo declined to elaborate on the specific amount he thinks the bank needs to survive. As of Sept. 30, the bank had $116 million in non-performing loans — more than 25% of its total loan portfolio.

That percentage of non-performing loans is one of the highest of any Gulf Coast-based community bank. Moreover, the bank is currently hovering in what regulators call undercapitalized territory, with a Tier 1 risk-based capital ratio of 5.39% as of Sept. 30. Tier 1 is considered an important gauge of a bank's health because it compares an institution's equity capital to its total risk-weighted assets. Regulators normally look for banks to have a Tier 1 risk-based capital ratio of at least 8%.

None of these issues shocks Leo. He took the job at Peninsula after his own effort to open a new bank in Sarasota was delayed by regulators to the point where he finally gave up earlier this year.

“Anybody who looks at the bank's numbers knows there is real risk [in investing capital] here,” says Leo. “But I truly believe there is value in this franchise.”

And now, as dozens of community bank executives work feverishly to avoid what has already happened to eight Gulf Coast institutions in 2009 — a fed-imposed shutdown — Leo's long-term/short-term approach adds a new wrinkle to the predicament.

“It's important to conduct the long-term strategy while you play the short game,” says Leo. “The two go hand-in-hand.”

Leo's strategy makes sense to Paula Johannsen, the managing director of the Tampa office of the Carson Medlin Co., an investment banking firm that focuses on institutions in the Southeast. “If he's just looking to investors to plug a hole,” says Johannsen, “then no one will do it.”

Still, Johannsen says any community bank on the Gulf Coast faces a “near impossibility” these days when trying to raise capital. Johannsen and her staff analyze banks all over Florida for Carson Medlin, although she declined to comment specifically on Peninsula's financials.

One issue, says Johannsen, is there are so many banks searching for money and not enough investors to go around. She says a community bank's best shot to get capital is either through its board or the friends and family route. But that road is a tough sell, too, as many board members and others are cash-strapped themselves as a result of the recession.

Peninsula recently hired Tampa-based investment banking firm Kendrick Pierce & Co. to lead the search for capital. In addition, Leo says other investment bankers have told him Peninsula has two things going for it.

One, it has an “aggressive, yet measured” strategy to clean up its bad loan portfolio. And two, the bank, led by Leo, has a new management team that doesn't have an “emotional attachment to its existing assets” or loans.

On the latter point, anyone who invests in the bank, says Leo, wants to see that it's not the same old management team making decisions. Instead, they want to see that new executives can come in and “get this stuff done.”

Raised spirits
Moreover, Leo's spirits are lifted by three recent cases of other bank's successful capital-raising efforts. One of those is the friends-of-the-bank method, as Bradenton-based Horizon Bank raised about $500,000 that way last month.

A few weeks after that, Bradenton-based Community Bank of Manatee closed on a deal to bring in $15 million of new capital. The money comes from a group led by a Brazilian investor, who previously made unsuccessful efforts to buy into other Gulf Coast-based community banks.

And Orlando-based Seaside National Bank & Trust announced late last month that it received $40 million in capital from a trio of private equity firms. Existing shareholders at the bank, which has offices in Tampa and downtown Sarasota, contributed to the investment as well, Seaside said in a Nov. 30 statement.

Leo, meanwhile, has spent a majority of his time with Peninsula making the same pitch to potential investors that he made to the bank's board in October: The bank has to have a sound long-term strategy so that it can survive beyond the current crisis.

That strategy is a back to the future moment for Leo, as some of his plans for Peninsula are directly from ConsumerFirst Bank, the would-be de novo institution Leo co-founded that never materialized. Leo took solace in the fact that regulators he met with about ConsumerFirst liked the bank's retail and consumer-focused concepts, but not the timing of opening during a recession.

Some of those ConsumerFirst plans included nighttime and full weekend hours, stock ownership for checking account customers and a kid's banking club. The strategy was to also maintain a healthy balance between retail customers and real estate-centered commercial loans.

Leo is again talking up ideas such as the kid's club and maintaining a diverse customer base, only now he's doing it in front of potential Peninsula investors. “The strategy will still include real estate lending,” says Leo, “but only as one piece of the overall pie.”

There is one other element to Leo's survival strategy at Peninsula: Be nice to your regulators.

It's not just a kiss-up approach, says Leo, but a legitimate source of hearing how the bank is doing, both the good and the bad. Leo says he asks Peninsula's regulators questions regarding everything from overall strategy to specific loan workout issues and ideas.

“It's not productive to have an adversary relationship with regulators,” says Leo. “I look at them like they are consultants.”

Peninsula Bank: A History
Peninsula Bank has long been one of the only Gulf Coast community banks to be based out of Englewood, a small, unincorporated town in southern Sarasota County.

The bank is also one of the only Gulf Coast-based community banks to have branches on both coasts of Florida. Sarasota-based Century Bank had branches on both coasts, too, but regulators shuttered institution last month.

Peninsula was founded in 1986 as First American Bank of Charlotte County. It changed its name to Peninsula State Bank in 1991 when new investors took over the bank. Sarasota investor Simon Portnoy bought a controlling interest in the bank in 1995 and he shortened the name to Peninsula Bank in 1998.

The bank currently has 135 employees. It has 12 branches spread across Charlotte, Sarasota, Broward, Dade and Palm Beach counties.

REVIEW SUMMARY
Business. Peninsula Bank, Sarasota County
Industry. Banking
Key. The bank is engaging in an all-out effort to find sources of capital to cover its outstanding loan issues.

So see Peninsula Bank by the numbers, download it here. BytheNumbersPeninsula.pdf

Mark Gordon covers the Sarasota-Manatee region. He can be reached at [email protected], or 941-362-4848.