Staging an Encore

REVIEW SUMMARY
Bank. Encore National Bank
Trend. Investors see opportunities in community banking.
Key. Community banks will be participants in the economic recovery.

Tom Ray recently sent out informal invitations to customers of his newly formed bank in Naples to watch golf together on TV after work.

To his surprise, 60 people showed up to mingle.

In an age when social networking means huddling alone on Facebook, Ray says the recent hobnob shows people still enjoy the human connection of the local community bank. “We try to be the social network for them,” says Ray, CEO and president of Encore National Bank. “We're advice givers, we're connectors.”

Ray and a group of investors from Naples and Ohio invested $28 million last year to form Encore National Bank. They're betting that traditional community banking can thrive on the Gulf Coast despite the fact that regulators have been closing them at a steady pace.

Ray, a 30-year veteran of Florida banking, counts nine recent bank failures in the three-county area that includes Charlotte, Collier and Lee counties. Of the 18 banks left, Ray estimates just eight to 10 are healthy enough to compete and the rest are struggling to remain in business.

Fewer competitors give Ray confidence that Encore can thrive. The economic moat will remain in place because it's unlikely federal regulators will approve the creation of more banks anytime soon.

Now that the economy has stabilized and in some cases improved, Ray says he's finding customers who need loans. In particular, there are opportunities to lend money to small businesses and professionals who cater to a growing population. “We believe in this market,” Ray says.

Entrepreneurial backers

It takes some courage to invest in a community bank after the carnage, but Encore's principal backer has plenty of experience with startups. Malachi Mixon III is the Ohio-based entrepreneur behind the Dirt Devil vacuum cleaner and chairman of medical-equipment giant Invacare. He says he sees opportunity while competing Florida-based banks are bogged down by capital constraints.

“When everyone goes north, I like to go south sometimes,” says Mixon, who owns a house in Naples. “This is one of the best areas to be in the United States.”

Mixon tapped a wide network of investors in the Cleveland area. The board also includes Naples investors, including Theodore Etzel III, president and CEO of Conditioned Air in Naples. “I was able to get a lot of Clevelanders to back me, but half of Cleveland lives down here,” Mixon chuckles.

Late last year, Mixon and other investors acquired National Bank of Southwest Florida, a small bank that was started in 2007 in Port Charlotte. Because it had started after the real estate bust began, National Bank of Southwest Florida had none of the bad loans that many community banks made in the earlier boom. “I think our timing is very good,” Mixon says. “If we had gotten the bank at the height of the real estate boom, we would have been in trouble.”

Once they had acquired National Bank of Southwest Florida, the new bank owners bought four Encore Bank branches in Naples, Fort Myers and Sun City Center that were owned by Houston-based Encore Bancshares. They decided to rename the entity Encore National Bank and relocated the headquarters from Port Charlotte to Naples. Because the deal closed on the last day of 2010, the consolidated bank's financial statements reflect one day's business.

And in a quirk of bank accounting, the acquisition resulted in a one-time gain in excess of $5 million. Technically called a “gain on bargain purchase,” it's treated as noninterest income. Translation: “The value of what we purchased was worth more than what we paid for it,” Ray says.

Because of that one-time gain, National Bank of Southwest Florida rose to the top of the Business Review's rankings for the return on assets and return on equity and among the top 10 in profitability. The Federal Deposit Insurance Corp., which the Review uses to compile its quarterly banking charts, has not yet changed the name of the bank in its reports to Encore National Bank and still refers to it as National Bank of Southwest Florida.

Without the gain and because of the startup and consolidation expenses anticipated this year, the bank is unlikely to repeat its top performance in the Review's rankings. However, Ray says he's confident the bank will achieve operating profit this year.

Money to lend

Mixon says the bank will focus on lending to entrepreneurs. “This is a very good area for doctors and small businesses; we want to be their community bank,” he says. “As I see it, we're one of the few banks that wants to make loans; we have over $100 million in cash to lend out.”

There are signs of an improving economy, particularly in Collier County. That county is leading the recovery in the three-county area that also includes Charlotte and Lee.

While Encore has a branch in Sun City Center near Tampa, Ray says the bank's focus for now is on Charlotte, Collier and Lee counties. “The first thing we want to do is solidify this,” Ray says.

Certainly, the residential resale market has been active. For example, the Naples Area Board of Realtors reported 7,840 residential sales last year. “Residential has bottomed and is starting to move up,” Ray says. Those transactions help countless businesses, from title companies to insurance providers.

Ray says the busy winter season has rebounded after several down years. “Tourism is back,” he says.

Commercial real estate remains troubled, Ray says, but that hurts mostly speculators who aren't his customers. Companies that own and use commercial space aren't likely to feel the same impact of declining values.

But lower real estate prices make Charlotte, Collier and Lee counties more competitive. And local municipalities have become more business friendly by cutting the time it takes to obtain permits, Ray says.

Encore National Bank currently has nearly $238 million in assets and Ray anticipates assets to reach $500 million within five years. Most of that growth will be internal and it may include some branch acquisitions, or what he calls “fingers and toes.”

Ray says there may be opportunities to branch out in its existing territory. Locations may include eastern Collier County, Marco Island or Bonita Springs.

Unlike some rivals, Ray doesn't plan to spend precious resources to start a trust company or a money management division. “We focus on being what we are,” Ray says.

Besides, Encore has plenty of startup costs to contend with this year, including computer conversions, new checks for all clients and legal fees associated with the regulatory matters. “In the first quarter we built the bank,” Ray says.