Happier returns

Size isn't everything in banking.

Consider Charlotte State Bank & Trust, a community bank headquartered in Port Charlotte with $271 million in assets. Its 15% return on equity was second only to Raymond James Bank in St. Petersburg, at $10 billion assets the region's largest bank.

Return on equity is measured as annualized net income as a percent of average equity. It's what the bank's owners are earning on their investment.

Besides return on equity, Charlotte State Bank also ranks highly in return on assets, a similar ratio that measures net income as a percent of average total assets. This tells you how well a bank is managing its assets to generate profits regardless of the bank's size. (Charlotte State Bank is a subchapter S corporation, which gives it a corporate tax advantage over other banks.)

Despite its location in one of the hardest-hit areas of Florida during the downturn, Charlotte State Bank has benefited from several positive trends, says Craig DeYoung, the bank's president.

The first positive for Charlotte State Bank is that it doesn't pay a lot of interest on its deposits. Banks make money on the spread between what they pay for deposits and what they charge to lend. “We have become a solid place for the locals to bank, and as a result those low cost of funds help us decrease interest expense,” says DeYoung, pointing to a 17% increase in low-interest deposits.

In addition, Charlotte State Bank hasn't had to set aside as much capital for potentially bad loans, and that flowed directly to the bottom line. “That's a significant reason,” he says.

In addition, Charlotte State Bank operates a profitable trust department, one of the few banks in the Charlotte County area to offer that kind of money management. “We're up to $179 million in assets under management,” says DeYoung, noting that its trust department generates nearly 20% of the bank's profits.

Meanwhile, Raymond James Bank also benefits from low cost of deposits. That's because cash from the parent company's brokerage accounts gets swept into the bank, providing a big source of deposits with low interest expense, Securities and Exchange filings show. Raymond James Bank President and CEO Steve Raney was not available to discuss the bank's performance, a spokeswoman says.

Some banks on the Gulf Coast have made big recoveries by this measure. For example, Preferred Community Bank in Fort Myers had the biggest point change in return on equity of any bank headquartered on the Gulf Coast in the first quarter compared with the same quarter one year ago.

“We're seeing the light at the end of the tunnel,” says Brenda O'Neil, chairman and CEO of Preferred Community Bank.

O'Neil says Preferred Community shed bad loans and a capital raise will help give it a cushion to lend. While the bank was launched in 2007 as a commercial bank, O'Neil says it has been doing residential lending lately. “We started doing some home lending because we were at the bottom of the market,” she says.

O'Neil says Preferred Community Bank recently raised $2.8 million in capital from new and existing shareholders. “It gave us fuel in the tank,” she says. “Lending is finally starting to pick back up.”

Sanibel Captiva Community Bank also posted a big rebound in return on equity from the first quarter of 2012. Fewer foreclosures and associated expenses were big drivers of profits. “The writeoffs will not be anywhere near what they were in 2012,” says Craig Albert, the bank's president and CEO.
Albert says the real estate market continues to improve, particularly on the island communities of Sanibel and Captiva in Lee County. “There's been a lot of activity this last selling season,” he says. “Values have stabilized.”

The region's largest banks are also benefiting from improved profitability, in part because of a strict control on expenses. “We focus on our efficiency ratio, and that's going to be a major focus going forward,” says Joseph Chillura, the CEO of USAmeribank in Largo. The efficiency ratio is calculated by non-interest expense such as salaries and premises as a percentage of interest and non-interest income.

Meanwhile, loan growth and mortgage originations have provided a boost to revenues at USAmeribank. “We're pleased with our progress,” says Chillura. But, he adds, “We want to be doing better than 15% return on equity and well above 1% on assets.”

Not every bank is seeing improvements in these return ratios in the first quarter compared with the same quarter in 2012. For example, C1 Bank in St. Petersburg showed increases in income, but big jumps in expenses that more than offset those, according to FDIC data. C1 Bank officials could not be reached to discuss first quarter results.

Florida Bank in Tampa and First Community Bank of Southwest Florida in Fort Myers posted among the lowest returns on assets and equity on the Gulf Coast, hurt by big sums set aside for potential loan losses. Officials with these banks did not respond to requests for comment.