Falling margins

Part of the path to sustained growth at Clearwater-based USAmeriBank has its roots in a baseball field, and before that, a basketball court.

It stems from Mark Fernandez, former senior vice president with the Tampa Bay Rays. Fernandez, who also worked in marketing and sales for the Arizona Diamondbacks of the MLB and Phoenix Suns of the NBA, left the Rays in July after a 10-year stint. He's now an independent consultant for Tampa area businesses, with a focus on how community relations can help grow a customer base.

USAmeriBank, of the largest banks in assets in the region, hired Fernandez a few months ago. One of his tasks: Help the bank lure new customers who open deposit accounts, the cheapest kinds of funds for bank. More deposit accounts, in turn, can be a cushion against shrinking net interest margins — a challenge with which dozens of community banks are currently grappling.

“It's hard to get people to move to your bank, especially businesses,” says USAmeriBank President and CEO Joe Chillura. “That's because switching is so complicated.”

Several other bankers in the region have placed net interest margins, the difference between interest earned and paid for any institution, at the top of their worry list. A low net interest margin can mean less profit for banks. “Most banks under $10 billion watch net interest margin very closely these days,” says Chillura.

For Neil McCurry, CEO of Sabal Palm Bank in Sarasota, net interest margin is one of the top three areas of focus, along with ensuring high asset quality and continuing to give out loans.

The general goal, says McCurry and other Gulf Coast bankers, is a net interest margin at or above 4%. But with federal interest rates as low as they are, those days are gone. Right now, most banks are operating in the 3.5% to 3.75% range.

“There are certain things in the industry that we can't control, like interest rates being so low,” McCurry says. “So we're focused on the composition of our deposits.”

At Sabal Palm, loans make up about three quarters of its portfolio and securities make up roughly the other quarter. With loans yielding maybe 5%, McCurry says, and securities earning about 2%, it's hard to stay at 4% net interest margin overall. For that reason, McCurry says “we need to continue making loans to the community.”

Shaun Merriman, president and CEO of Gateway Bank of Southwest Florida, echoed that statement, specifically referring to small business loans. Despite holding only about 20% of total bank assets nationwide, community banks issue more than half of small business loans, he says.

And regardless of where net interest margin figures go from here, that needs to continue. “We're doing exactly what we want to do,” Merriman says. “We're somewhat of a lifeline to small business growth.”

A possible advantage for community banks can be offering more customized loans, says David Hall, executive vice president, CFO and COO of Sanibel Captiva Community Bank.

Sanibel has specialized in customized loans on which they charge slightly higher interest rates and higher-cost certificates of deposits, he says. The problem with that, however, is the decline in higher cost CDs, which Hall says accounted for three quarters of the bank's deposits five years ago but have since declined to 25%.

The upshot for community banks: Getting back to the 4% net interest margin range promises to be a long process while interest rates slowly rise. The wait, bankers add, could present new challenges. “The industry,” Merriman says, “can't continue taking compression without eventually talking about bank consolidation.”