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Disappearing Act for Some Florida Banks

Since the financial crisis hit, no buyer has acquired more failed banks in Florida than Bond Street Holdings, a company formed in 2009 that’s raised $740 million to buy failed lenders. Bond Street acquired eight banks and now runs them under the name Florida Community Bank, a failed Immokalee institution that was Bond Street’s second purchase.

Bond Street rides a consolidation wave that some bankers estimate will shrink the number of community banks in Florida from the 300 of just a few years ago to as little as 150 in five years. Nationally, the number of banks has fallen by 31% in 15 years.

So far, consolidation has been driven largely by the failure of 63 Florida banks since 2007. But FDIC closures are becoming less of a factor. As the economy continues its plodding recovery, further consolidation will likely involve the ranks of institutions that aren’t failing but aren’t really succeeding either.

Miami bank analyst Ken Thomas says 7.6% of Florida bank assets are non-performing, compared to only 4.2% nationally. Florida banks, meanwhile, are averaging a return on assets of just .50%, compared to 1.02% nationally. And some of that meager profit is a function of banks under-reserving for loans.

Among the 217 or so banks left standing in Florida, those performance figures translate into scores of netherworld banks — institutions in no immediate danger of being seized by the FDIC but with little hope of generating returns investors would want. John W. Allison, chairman of Home BancShares, an Arkansas company acquiring Florida banks, estimates 50 banks in Florida “are on the bubble. They probably need to close. They’ll never earn their way out of it. Boards are tired. Management’s tired.”

Along with weak-performing assets, growing regulatory costs also are driving consolidation. The Office of the Comptroller of the Currency, the Federal Reserve and FDIC are issuing new rules to bring U.S. banks in compliance with the international Basel III agreement. Anti-money laundering rules and laws such as the Bank Secrecy Act have raised the compliance stakes. Meanwhile, the 2010 Dodd-Frank financial regulatory law brings its own legion of rules. Dodd-Frank “makes everybody nervous,” says Benjamin C. Bishop Jr., chairman of Jacksonville-based investment banker Allen C. Ewing & Co.

In an irony not lost on community banks, new financial regulations that were aimed primarily at curbing the behemoths are hurting small-fry banks that lack the economies of scale to absorb the increased regulatory costs — software, for example, and a raft of other infrastructure, including compliance officers who can command six-figure salaries.

Andy Greenwalt, CEO of New Haven, Conn.-based Continuity Control, a bank compliance consulting firm, notes that large banks can comply with new regulations on a straightforward real estate loan in less than the eight hours of work the government estimated in writing the regulations. It’s taking small banks 32 hours to comply with the same mandates, however.

The rising costs are raising the bar on what it takes to survive. Once, a Florida bank with $150 million to $200 million in assets could earn a good return for its investors. Now, with costs rising, some bankers say, viability takes about $1 billion in assets. Indeed, Florida Community President and COO Kent S. Ellert says that without a couple billion of dollars in assets, it’s hard to reap the economies of scale necessary to provide the kind of 20% return on equity investors want. “I just don’t think you can do it,” Ellert says. “I don’t think the cost structure allows you to get there.”

Alex Sanchez, CEO of the Florida Bankers Association, points to a July column in the Wall Street Journal titled “Who Wants to Start a Bank? No One.” Adds Sanchez, “because of the regulatory burden.” Indeed, applications to form new banks in Florida have totaled just three over the past 3½ years, less than the total for any single year since 1992. Banking attorney Bowman Brown, of Shutts & Bowen in Miami, says the FDIC feels the nation has enough financial institutions and so won’t insure deposits of startup banks, effectively keeping new applicants from getting charters.

Florida needs a mix of large and small banks, says Sanchez. FDIC research shows banks with less than $1 billion in assets account for 37% of small loans to businesses and farms.

Regulators say they’re sensitive to community bank issues and are studying the situation. “The enemy isn’t compliance,” Greenwalt says. “The enemy is the cost of compliance. The cost of anything is a function of how you do it. The technology exists to fundamentally change the cost to operate anything. The folks with a plan are starting to buy up the folks without a plan.”

Capital has come into Florida from private equity firms, out-of-state banks and Spanish banks. Bond Street is a case in point. Its capital came from private equity and institutional investors from a broad national and international base and its top leadership has New York roots. But it’s highlighting its Florida orientation as Florida Community Bank.

“We believe there is an opportunity for a Florida-based, Florida-focused institution,” says Ellert, who has spent 19 years in Florida banking with First Union/Wachovia and Fifth Third. Based in Weston in Broward County, he oversees 41 branches and stresses local decision-making in individual Florida markets. Florida Community, with $3.5 billion in assets, is in Orlando and south Florida and wants to be in Tampa and Jacksonville. “We are extremely sound,” he says.

Bond Street has filed to go public but hasn’t specified a time frame for doing so. Through the first half of 2012, it lost $8.6 million, a wider loss than the $4.3 million loss in the first half of 2011. Paul D. Burner, CFO and executive vice president, says that with the majority of infrastructure investment behind it, the company is “positioned for and driving to profitability.”

Given the competition for the shrinking number of FDIC-seized banks, some acquirers have changed tack to focus on organic growth, while others seek to acquire banks not in FDIC receivership [“Well-Heeled”].

Consolidation outside the FDIC process begets its own hurdles. There’s a gulf between how acquirers value a bank and what directors at that bank can stomach in losses on their investment. Some banks simply are too small to interest acquirers because acquiring and integrating a small bank tends to be as labor intensive as buying a large one — without the same payoff. Also, says Bishop, regulators are hampering the ability of middling capitalized banks to merge into viable institutions.

In rankings kept secret, regulators rate banks on a scale of one to five — five being death’s door — on their capital adequacy, asset quality, management quality, earnings, liquidity and sensitivity to market risk (CAMELS). If a deal doesn’t result in a pro forma bank meeting all requirements for a CAMELS 2 rating or better, regulators won’t let it go through, he says. “Half the banks in the state are CAMELS 3 or higher, maybe more,” Bishop says, which means those banks can’t merge with each other to create a sustainable bank. Bishop says regulators should stick to the capital standard for CAMELS for allowing mergers but not let midlevel grades on the rest of the CAMELS test thwart combinations. “How in the world can these little banks make any money and survive? They’ve got to get bigger. If they can raise enough capital to meet the regulatory requirements, let them merge,” he says.

Meanwhile, Florida Community and its parent Bond Street still have $270 million to deploy buying banks. Says Ellert, “We’re very much in the marketplace looking.”

Casualty Count: Bank Failures by Region

Bank failures in Florida in large measure reflect population distribution in the state. Thirteen banks failed in three counties in south Florida since 2008. But many failures occurred in parts of the state not known for financial chicanery and overheated real estate markets. The much smaller north Florida market, from Pensacola to Palatka in Putnam County, had just as many failures as south Florida. Of the five biggest bank failures in Florida, only one — though by far the biggest — was in south Florida.

Case in point: Historically, Jacksonville was the most resilient of Florida’s banking markets, thanks in part to a steady economy that didn’t get swept up in the state’s wild real estate booms. But as national home builders discovered the region in the most recent run-up, a considerable number of new banks followed. “They were speculative in nature, and Jacksonville had more than its share,” says Ben Bishop Jr., chairman at Allen C. Ewing & Co., a Jacksonville firm that provides corporate finance services to community banks around the
state.

As a result, northeast Florida’s community banks have been hard hit recently. “And we’re probably going to lose two to three more,” Bishop says. The casualties have included some longtime, formerly conservative players, such as First Guaranty Bank and Trust, Jacksonville’s oldest bank, which was shuttered in January by state officials.

Florida’s Five Biggest Bank Failures (Since 2007)

Bank Headquarters Estimated Loss to FDIC
BankUnited Coral Gables $5.8 billion
Orion Bank Naples $883 million
Riverside National Fort Pierce $606 million
Peoples First Panama City $515 million
Florida Community Immokalee $331 million
Note: Both BankUnited and Florida Community have reopened under new ownership.

Widespread

All regions of Florida were affected by bank failures over the past four years, including counties not known for getting caught up in the housing bubble.