It's a small world

Executive Summary
Industry. Banking Trend. Shrinking number of community banks Key. Small community banks are profitable again.

There were 64 community banks on the Gulf Coast in March 2006. Now, from Pasco County north of Tampa to Collier County in the south, there are just 26 left who have assets of less than $500 million, according to an analysis of banking data from the Federal Deposit Insurance Corp.

A new bank hasn't been chartered in Florida in five years, but that might be about to change as the economy recovers and banks become profitable again.

Drew Breakspear, the commissioner of the Florida Office of Financial Regulation, says informal discussions with prospective investors at the Florida Bankers Association annual meeting recently indicated a formal bank-charter application might be forthcoming. “I think we could see one this year,” he says.

A federal regulator recently told NorthStar Bank President and CEO David Stone that there are four groups of investors in Florida who are considering filing an application for a new bank. “You'll see a proliferation of new banks,” says Stone, who has been in banking for five decades.

“What I think will start to happen — and it will be slow — the cycle will start over again,” says Brenda O'Neil, chairwoman and CEO of Preferred Community Bank in Fort Myers.
“Investors will come back.”

Federal regulatory hurdles are significant, but in a sign that change is afoot, the Federal Deposit Insurance Corp. in April reduced the time that newly formed banks must be under strict supervision from seven years to three years. In a statement, FDIC Chairman Martin Gruenberg says: “De novo institutions fill important gaps in our local banking markets, providing credit and services to communities that may be overlooked by larger institutions. The FDIC welcomes applications for deposit insurance.”

Too small to comply
While community banks with assets of less than $500 million were decimated by the recession, those that remain are only now showing profits. There are many reasons for this, but chief among them are regulatory burdens the Dodd-Frank Act and the Federal Reserve's low-interest-rate policies.

Even state regulators say the federal burdens are excessive. In an article in American Banker magazine, Breakspear says Florida community banks have suffered from excessive regulations designed for national banks. The expense of keeping up with 20,000 pages of rules makes many community banks “too small to comply,” Breakspear says.

“I think it's going to take $1 billion [in assets] to have a really successful and profitable bank,” Breakspear says. Unless the rules are eased, that's the size banks needs to be to overcome the burden of federal regulations.

Although the minimum capital to start a bank today is $8 million, many bankers agree that you need more than twice that amount to overcome the regulatory burdens and absorb what is likely to be losses in the first three years of operation.

Meanwhile, some community banks are in a hurry to get bigger to overcome those burdens. “The plan is that we have absolutely no desire to remain at $150 million in assets,” says Jim Kuhlman, the newly appointed president and CEO of 1st Manatee Bank in Parrish.

Kuhlman's target size is $400 million in assets, and to do that he's raising $12 million in new capital and will expand to Sarasota next year. “Static isn't in my vocabulary, really,” he says.

“You can be a viable bank between $500 million and $750 million,” says Joseph Caballero, president of Gulfshore Bank in Tampa, who will be opening a branch in downtown St. Petersburg this summer. “I don't think you can consistently produce returns to investors unless you reach $1 billion or more. It's just simple math.”

Caballero, whose bank had $302 million in assets as of March 31, says regulatory costs are just part of the reasons small banks need to grow bigger. “There are a lot of other headwinds,” he says, citing low interest rates, rising expenses of wages, health care benefits and technology to protect against cyber criminals.

First National Bank of Pasco with $143 million in assets is also expanding and plans to open a new branch in fast-growing Land O'Lakes in southern Pasco County. “Our biggest thing is we need to grow,” says Kerry Westbrook, senior vice president and chief financial officer with the bank in Dade City.

“You talk to the industry and they say you need at least $500 million [in assets],” Westbrook says. “I don't think they're far off.”

NorthStar Bank also aims to grow to $500 million in assets from its $211 million as of March 31. “That's a level where economies of scale work in your favor,” says Stone. “We've doubled our loan portfolio in the last two years.”

Some small banks benefit from being part of multibank holding companies and can spread some of the cost of back-office operations. For example, Charlotte State Bank & Trust is part of Crews Banking Corp., a four-bank holding company based in Wauchula.

“We feel we can continue to survive because of that scale,” says Michael Aloian, president and chief investment officer with Charlotte State Bank & Trust, which reported $317 million in assets as of March 31. Its sister bank on the Gulf Coast, Englewood Bank & Trust, reported $256 million in assets.

Charlotte State Bank also has benefits from offering fee-based services such as wealth management and trust services. Such non-interest income has helped community banks that have been squeezed by low interest rates. “Net interest margin has been shrinking for so long we feel we have to have these other services,” Aloian says. “Wealth management and trust services make sense, especially in Florida.”

Small is OK
Bigger doesn't mean better, some bankers say. “I'd rather be smaller and profitable,” says O'Neil, whose Preferred Community Bank reported $110 million in assets as of March 31.

Fact is, bigger banks also have higher expenses as they grow in asset size and expand into different businesses such as insurance and money management. “I'm not a believer that bigger is better from a cost-compliance standpoint,” O'Neil says. Focusing on residential lending and keeping its business simple is a key to managing regulatory expenses, she says.

In addition, the dwindling number of community banks means less competition for those that remain. “If you're in a niche business or a town where you can monopolize the lending in that community, you can do very well,” says state regulator Breakspear.

Indeed, two of the best-performing community banks in the country are small lenders located on the Gulf Coast: First Home Bank in Seminole and Sanibel Captiva Community Bank.
First Home and Sanibel Captiva were the only two banks on the Gulf Coast recognized recently by Independent Banker magazine as among the “best of the best” among the nation's 6,000 community banks using 2015 data.

First Home Bank, with $115 million in assets as of March 31, ranked fifth in the nation in its size category for its 2.5% return on average assets and fourth for 30.25% return on average equity. Sanibel Captiva Community Bank, with $292 million in assets as of March 31, ranked 18th in the nation for its 15.15% return on average equity.

These community bankers say running a small lending institution is much like any business where watching expenses is key. “We really run a tight ship,” says David Carleton Hall, executive vice president, chief financial officer and chief operating officer of Sanibel Captiva Community Bank. “Our occupancy expense is half of what our peers are. My desk here is a modular desk that's 15 years old and it's used.”

Hall says hiring highly trained people is another key to small-bank success because they can do their jobs better than several less experienced people. “They're much more efficient with their work,” Hall says.

First Home Bank has benefited from focusing on niche businesses such as Small Business Administration loans. First Home is among the top 30 SBA lenders in the nation. In an email statement, First Home CEO Anthony Leo sums up his bank's success: “Notwithstanding the challenges presented by transient economic conditions and increasing regulatory burdens, we believe the long term future of community banking remains bright, particularly for those who retain the most talented staff, invest in evolving technology and maintain strong regulatory relations.”

Who's left?

The number of community banks from Pasco to Collier counties on the Gulf Coast with less than $500 million assets has declined by nearly two-thirds in the last 10 years, according to data from the Federal Deposit Insurance Corp. through March 31. Here's who's left: