Shrinking Banks

The last banking crisis wiped out the savings-and-loan institutions. Are community banks in Florida under the same threat today?

Commercial real estate is the bread-and-butter business of community banking in Florida and what happens to that sector will likely determine these lenders' future.

Forced by government regulators to set aside millions of dollars for potential loan losses on commercial real estate, the 74 banks headquartered on the Gulf Coast from Tampa to Naples lost a total of $197 million in the quarter of this year, according to the Federal Deposit Insurance Corp.

That tally does not include Orion Bank's net loss of $84 million in the third quarter before regulators shut it down on Nov. 13 and sold its deposits and assets to Louisiana-based IberiaBank. At the time, Naples-based Orion was the Gulf Coast's second-largest bank with $2.7 billion in assets.

“There will be a few community banks left, but not many,” says Charles Idelson, president and chief executive officer of Investors' Security Trust in Fort Myers and a 30-year veteran in banking. “They're losing so much money.”

Of the 74 banks headquartered on the Gulf Coast, only 15 were profitable in the third quarter. Of those, just seven reported increased profits over the same quarter in 2008.

“The community banks felt the only way they could compete was to make more speculative loans,” says Richard Botthof, a veteran banker in Naples and vice chairman of the Sanibel Captiva Trust Company.

Botthof sees parallels now to the savings-and-loan crisis of the late 1980s. “The S&Ls got in trouble because they loaned more money, charged less and lowered their credit standards.”

Meanwhile, private equity funds are scouting for failed banks they can acquire at a discount and sell off in parts like a car through a chop shop. “When they get through, there will be no bank,” says Robert Sumner, a longtime banker who is president of First National Bank of Pasco. “They'll make their $10 million or $20 million and go back to New York.”

Regulators aren't helping.

They're forcing community banks to beef up their capital levels at a time when raising money is nearly impossible. For example, lack of investor demand forced Bank of Florida Corp. on Nov. 19 to postpone a secondary offering that executives hoped would raise $71 million for the holding company's three banks in Tampa, Naples and Fort Lauderdale.

Meanwhile, well-capitalized out-of-state banks such as BB&T and IberiaBank are buying market share in Florida with the help of the FDIC, which has pledged to take most of the losses on bad loans for as long as 10 years. In some cases, such as IberiaBank's acquisition of Orion, the regulators are paying acquirers to take over failed institutions.

Down, not out
But don't count community bankers out yet.

“There's always going to be a place for community bankers,” says Donald York, president of Shamrock Bank of Florida in Naples. Newly formed Florida Shores Bank-Gulfcoast is acquiring Shamrock for its charter in a deal that's pending regulatory and shareholder approval.

Community banks provide financing for small businesses that are often overlooked by larger institutions, local bankers say. “The community banks that are in a strong capital position are going to withstand the economic pressure,” says York.

“In a year, you're going to see community banks rebounding,” says Charles Murphy, president and chief executive officer of The Bank of Commerce in Sarasota. “Investors will take advantage of opportunities and capital will come back.”

The failure of weak community banks will benefit those left standing because there will be less competition, says Robert Guididas, president and chief executive officer of Bank of Naples, which has raised $4 million in capital this year. What's more, regulators are unlikely to approve the formation of any new banks in the near future, creating an economic barrier to new entrants.

And the handful of new community banks that have successfully raised money recently won't be immediately weighed down by bad real estate loans that are saddling their competitors. “It's very easy for us to wait it out. We're in no hurry to jump on any loan,” says Gary Tice, chairman and chief executive officer of First National Bank of the Gulf Coast, which opened in October with $35 million in capital.

Besides, there are investors who believe they can profit from picking winners.

“In the last 90 days, we're starting to hear about folks who have their hands on significant capital and they seem to be choosing banks that have been doing well through this process,” says Charles Brown, chairman and chief executive officer of Insignia Bank in Sarasota.

Focus on commercial assets
In the immediate future, commercial real estate will have a big impact on what happens to community banks. That's because community banks traditionally compete with the larger banks for these kinds of loans, not car loans or other consumer loans that national banks turned into commodities.

Rising vacancies and declining rents are pressuring commercial real estate values across the region. Besides defaults, regulators are forcing lenders to set aside additional reserves to account for potential loan losses.

“They're forcing write-downs like you wouldn't believe,” says Stephens Woodrough, a bank consultant who was the former regional counsel for the FDIC's Atlanta office. “A lot of the regulators are overreacting out of fear they'll be called on the carpet.”

Bankers differ in their outlook for commercial real estate. Tice estimates it will take another 18 months for commercial real estate to hit bottom in the Lee and Collier region. “We have the capital to wait it out,” says Tice. “We haven't approved a lot of those [loan] requests.”

“I don't think we're at the bottom of value declines,” says Bill West, president of the Bank of Tampa.

That's because many loans in the commercial mortgage-backed securities market are coming due and that financing mechanism has virtually disappeared. That could force property owners to sell at a discount, pushing down values.

Regulators aren't waiting for the commercial real estate market to come around. “The regulatory agencies are coming in and looking at their portfolios and requiring them to take more losses now,” says Martha Bibby, a banking consultant in Naples.

However, West says it's important to separate buildings owned by entrepreneurs with successful businesses from those landlords who lease space. “I don't really see that as being a problem,” says West, referring to “owner-occupied” space. “There's still cash flow servicing the debt,” he says.

“Certainly commercial real estate has taken a hit, but I think we've hit the bottom,” says York. “I do think we've seen the worst of it.”

Government moat
While the government picks winners and losers in banking, regulators are also likely to establish a moat around the survivors. Most agree it won't be as easy to start a community bank in the future because the FDIC won't insure one without higher capital and experienced management.

“Years ago, you could start a bank with $2 million to $3 million,” says York. Today, York says institutions will have to start with a minimum of $30 million.

“I don't think you're going to see small banks anymore, mainly because the regulatory environment has changed,” says Tice. To open First National in October, Tice had to gain control of Panther Community Bank in Lehigh Acres, which was chartered in 2007.

Idelson says regulators won't let out-of-work bankers start financial institutions in the same way that happened in the last cycle. “You had people who were inexperienced bankers become presidents,” he says.

Other than private equity, investors' appetite for banks isn't likely to revive after this cycle is over. “People are just scared to death to invest in anything,” says Sumner.

Although there are parallels to the savings-and-loan crisis of the late 1980s, this downturn is much broader. “The whole financial system wasn't called into question,” says West. Still, he adds: “One of these days we'll forget.”

Other bankers are more sanguine about the long term, especially if the government doesn't stand in the way. “There will be a time when another flurry of community banks will be created,” says Murphy. “When the opportunities arise, you'll see them come back again.”

REVIEW SUMMARY
Industry. Banking
Trend. Commercial real estate values are dragging down community banks.
Key. Capital is the key to survival.

Consolidation ahead
Bank industry executives say a wave of consolidation is on its way, but only after the sector regains strength.

“I'm kind of surprised it hasn't happened already,” says Bill West, president of the Bank of Tampa.

West speculates that widespread consolidation hasn't occurred yet because banks can't properly gauge each other's financial health. “It's the uncertainty of what's in each bank's balance sheet,” he says.

Community banks must be healthier financially first. “I don't think the regulators are comfortable putting two weak banks together,” West says. “From a regulatory point of view, if you put two weak banks together you don't have a stronger bank.”

The consolidation wave may begin with larger banks as they outmaneuver their competition. That could spur a new round of community bank acquisitions after the FDIC-assisted deals end.

To compete against the larger banks, community banks will either merge with others and form “super community banks” or sell out to these larger institutions. “I think you'll see some affiliations across geography,” says Charles Murphy, president and chief executive officer of The Bank of Commerce in Sarasota.

“There's no room for the little guys,” says Charles Idelson, a longtime banker who is now president of Investors' Security Trust Co. in Fort Myers.

“The larger your capital base, the more you're able to do and the more you can compete,” says Richard Botthof, another veteran banker who is vice chairman of the Sanibel Captiva Trust Co.

“You're going to have more solid banks at the end of this,” says Daryl Byrd, president and chief executive officer of IberiaBank, the Louisiana-based bank that recently acquired Orion Bank in Naples and Century Bank in Sarasota.

Byrd says the wave of bank failures still has another two years to go. His own belief is that 1,000 banks will fail in this cycle nationally, though he declines to say how many of those will be in Florida.

“The people who make it through this are going to be pretty solid,” Byrd says. “This is the silver lining.”

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Jean Gruss covers the Lee-Collier region. He can be reached at [email protected], or at 239-415-4422.