Fewer Vaults

REVIEW SUMMARY
Industry. Community based banks
Issue. Reduction in numbers
Key. Finding one that's willing to lend

Small businesses love community banks because of their one-to-one service and the ability to easily reach a top executive when necessary. But while there are still plenty of companies and deposits along the Gulf Coast, the number of institutions based here has fallen considerably over the past year in the thick of the recession — with uneasy implications for local business financing.

Only 66 Gulf Coast banks filed reports with the Federal Deposit Insurance Corp. as of June 30, compared to 83 at the midpoint of 2009. FDIC-enforced closings and buyouts appear to be the biggest reasons for the contraction, and more institutions will likely be cleared from the landscape before the eventual recovery.

“We will see continued bank failures in our market, or consolidation with other organizations in order to survive,” observes Tramm Hudson, a banking veteran and consultant who now serves as Sarasota/Manatee president of New Orleans-based Whitney National Bank.

An argument can be made that there may have been too many banks in the Gulf Coast region, and all of Florida for that matter. The number of banks statewide fell to 265 through this year's second quarter from more than 300 in recent years, and 62% are considered unprofitable, according to FDIC data.

Losses lessening

Assets among FDIC-insured banks in Florida shrunk 7% over the past year to $154 billion, while deposits also fell nearly 6% to $123.8 billion. However, bank losses are far less than they had been, dropping to $395 million through the first six months of this year from more than $1 billion in the first half of 2009.

Return on assets statewide is still trending negative but also improving — standing at -0.52% midyear, compared to -1.22% a year earlier. Return on equity is -5.21% but also better than -12.98% a year ago. The ratio of noncurrent loans and leases to total lending appears to have stabilized at 7.54%, while the ratio of core deposits to total liabilities increased just over three percentage points over the year to 71.14%.

The number of bank failures in Florida so far this year, 22, exceeds the state's total for all of the last decade. Half those failures have occurred in the Gulf Coast region — one in the Tampa Bay market (Bank of Florida), three in Bradenton, two in Sarasota and five in Naples/Marco Island.

At least half the remaining banks in the Gulf Coast region have higher ROA and ROE than the statewide averages, with 18 posting positive numbers at midyear. Only 25 local banks posted net income in the positive range during the second quarter, with 18 in the black through the first half of 2010.

Those banks that are in the red may present acquisition opportunities through the latter half of the year. For example, Southwest Capital Bank of Fort Myers recently agreed to become part of Fort Lauderdale-based Stonegate Bank in an all-stock deal priced at $9.4 million, or 62% of book value. Stonegate previously bought Partners Bank and Hillcrest Bank, both in Naples, last October.

Righting the ship

Then there are banks that are trying to right the ship in order to survive.

Bradenton-based Horizon Bank posted second-quarter net income of $117,000 after losing $6.9 million in the same period last year, largely due to its ability to avoid write downs as well as additions to its allowance for loan and lease losses.

Horizon is still in the process of acquiring enough capital to satisfy regulators. The bank's holding company informed the Securities and Exchange Commission in August that its survival as an independent entity will depend entirely on its current stock offering, which can be extended into November.

Meanwhile, other profitable banks are in acquisition mode beyond the Gulf Coast. Largo-based American Momentum Bank in June purchased a majority stake in Aliant Bank near Birmingham, Ala. American Momentum was also a bidder for all three Bank of Florida subsidiaries in Tampa, Naples and Fort Lauderdale, which were ultimately acquired by Jacksonville-based EverBank.

Yet more of the local banks are likely to be acquisition targets themselves in the presence of much-larger companies. “There is no doubt that regional and large banks are aggressively trying to increase their market share,” Hudson says.

Those larger banks are in a far better position to lend money — something local independent banks seem unwilling or unable to do anymore. Hudson recalls the late-1980s banking boom in which institutions were set up to rake in retiree deposits in order to finance commercial real estate ventures.

The frenzy followed the usual real estate cycles, he says, citing a phrase he has often used over the years: “Lend on dirt, don't get hurt” quickly changed to “lend on dirt, lose your shirt.”

Lending reluctance

Ongoing reluctance to make commercial real estate loans is the biggest problem facing Gulf Coast community banks at the moment, according to Donald Flagg, an assistant professor of finance at the University of Tampa's Sykes College of Business.

For instance, a property owner with no debt who wants to finance renovations to lease out his building may still find difficulty getting financing, even with extremely low loan-to-value ratios.

“These loans would have been made easily 10 or 12 years ago, well before the real estate bubble and days of easy money,” Flagg says. However, he also points out that the problem has as much to do with banks' willingness to lend as it does with regulatory reform and bank regulators pointing institutions away from commercial real estate lending.

Hudson says a paradigm shift will be needed to assure survival of locally based banks, turning emphasis away from real estate and more toward helping businesses get through to the other side of the recession.

“Community banks reflect the condition of their customers, and those customers are hurting,” he says. “Anytime you go through these things it will be painful, but hopefully we'll come out the better for it.”

Bank Notes

• Valrico State Bank tripled its second-quarter net income over the year, from $133,000 to $531,000. Year-to-date income also improved 77%, from $483,000 to $857,000.

• The Royal Palm Bank of Florida, based in Naples, showed the most improvement in ROA among Gulf Coast banks over the past year, from -37.65% to -5.9%. Its ROE also improved from -223.04% to -66.21%

• Raymond James Bank, with its unique affiliation to Raymond James Financial in St. Petersburg, remains the Gulf Coast's largest with $7.5 billion in assets. That's twice as large as second-place Superior Bank in Tampa, with $3.4 billion.