2009 Industry Outlook
'The Good Years in Banking are Over': Financial institutions will be watching pennies as the industry shakeout lingers.
When he opened his bank nine years ago, Horizon Bank President and CEO Charles Conoley chose an unexciting path. Recall that the money in local banking in Florida for two decades was made in starting a bank, growing fast and selling out to a regional bank. And don’t forget residential real estate development lending.
“Our profit is way down, but we still are profitable. We’ve grown it at a much slower pace and watch our pennies.” — Horizon Bank CEO Charles Conoley [Photo: Jeffrey Camp]
Conoley, after spending the last real estate recession handling problem assets for what was then Barnett Bank, says he told his board, “We weren’t big enough to weather those kinds of problems if they became problems.”
So the Bradenton-based bank, capitalized with only $5 million initially, took a pass on residential development loans. It also let teaser-rate adjustable mortgages pass it by. Instead, it went after lending to small businesses, many of them blue collar or in the trades, and low-end residential, usually rental properties for which owners put down 20% to 25%. It lent on industrial development, which has held up better than other real estate sectors in Florida. It built a deposit base squarely on CDs and money-market accounts — 70% of deposits — a large percentage of them held by seniors. It sought the business of borrowers in a U.S. Department of Agriculture guarantee program for businesses in rural areas.
Others started bigger and grew faster. But in Conoley’s home county of Manatee alone, two failed and one troubled institution was sold in a shotgun wedding. They all took a pile of investor capital with them. “A lot of that was local dollars,” he says. “That’s pretty scary.” Meanwhile, Horizon still stands — one of only six publicly traded bank holding companies in Florida to earn a profit through the first half of 2008 — and still pays a dividend. Horizon’s holding company stock trades at about half its peak of $15 per share but is still at around book value — no small accomplishment considering most publicly traded Florida community banks trade below book. Its return on assets and return on equity are both well above the average for Florida publicly traded banks.
“Our profit is way down (30% in the first nine months), but we still are profitable,” Conoley says. “We’ve grown it at a much slower pace and watch our pennies.”
There will be lots of penny watching in banking this year. “Just like ’08 was, ’09’s going to be a tough year,” says Miami banking analyst and economist Ken Thomas. “It’s still going to be the toughest recession we’ve had since the early ’80s. The good years in banking are over.”
They ended in August 2007 when Fed Chairman Ben Bernanke ended predecessor Alan Greenspan’s profligate credit policy. Filings for bank startups reflect the tough times. Through last month, only six applications to start state-chartered banks in Florida were filed, the lowest number since 1995, according to the state Office of Financial Regulation. Interestingly, Florida’s financial sector was hanging tough, judging by the PCE Finance & Insurance Index, a measure of small, publicly traded Florida companies, through the end of September when the sector led all other industry sectors in Florida. Likely reason: The small banks the index measures weren’t exposed to the credit issues the money-center banks were.
The thinking now is that the good times won’t return until real estate rebounds, perhaps in 2010. Banks got hit with a “double whammy” in real estate, says Benjamin C. Bishop Jr., chairman of investment bank Allen C. Ewing & Co. in Jacksonville. Real estate accounts for the bulk of Florida bank problem loans, and its decline also took away bankers’ top lending segment and profit source. Net interest margins continue to be so narrow that all banks will struggle for profits.