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. “We’ve got some mortally wounded banks for sure,” Bishop says, but he expects nothing close to the 1,000 failures that came nationally in the 1988-91 savings and loan debacle.

The real estate collapse and credit crisis has reshaped Florida banking dramatically with the nation’s four largest banks, all partially nationalized, in the retail banking market here for the first time. After the October banking revolution, Wells Fargo, through its Wachovia purchase, and JPMorgan Chase, through its Washington Mutual buy, joined Bank of America and

Citibank, whose Florida presence is largely in the southeast part of the state. “We’re in a banking situation that’s totally changed overnight,” Thomas says.

Meanwhile, at tiny Horizon (three branches, $210 million in assets), Conoley sees encouraging signs. Problem loans seem to have peaked. Horizon has applied for $4.8 million from the federal bailout as easy capital. At 5% per year, it’s cheaper than what the bank would have to fork over to raise a similar amount.

Commercial and commercial real estate loan demand is higher at Horizon than in the past three years, some of it coming from good customers of failed banks “happy to find anybody who will talk to them about a loan,” Conoley reports. He’s opening a branch in Brandon this year.

“We think ’09 is going to be a lot better,” he says. “We’re more of a traditional bank, and the traditional became the unusual, and I think we’re going to go back more to the traditional.”

Bank Profits hard to come by In 2005 and 2006, before the subprime market exploded, the 18 largest publicly traded bank holding companies based in Florida earned an average return on assets of .86% and an average return on equity of 9.53%. During the first half of 2008, the 17 surviving banks earned an average .39% return on assets and 4.10% average return on equity. Only six were profitable:
Holding Company	Assets	Profit	Return on Avg. Equity*	Non- Performing Assets
Capital City (Tallahassee)	$2.7 billion	$12.1 million	8.09%	1.80%
Optimum Bank (Fort Lauderdale)	$252 million	$818,000	7.19%	1.06%
Horizon Bancorp. (Bradenton)	$210 million	$539,000	8.47%	2.07%
Center State Banks (Winter Haven)	$1.2 billion	$2.6 million	3.43%	1.07%
First Community (Pinellas Park)	$482 million	$707,000	3.76%	1.91%
Stonegate Bank (Fort Lauderdale)	$287 million	$290,000	1.39%	0.79%
*annualized Source: Allen C. Ewing & Co.

VC: Very Cautious

Venture capitalist Craig Burson: ‘The IPO market is essentially dead.’

“I think we all expect ’09 to be pretty tough for a lot of companies,” says Craig Burson, managing director of venture capital firm H.I.G. Ventures in Miami and chairman of the Florida Venture Forum. For the most part, VCs no longer are funding startups and early-stage companies. Instead, they’re concentrating on companies with a product developed, revenue and ideally some earnings. “The IPO market is essentially dead,” he says, and with debt markets so troubled, leveraged buyout deals will slow. Burson says reservations for the 2009 Florida Venture Capital Conference on Feb. 3-4 at the Naples Grande Beach Resort indicate a strong year for attendance, perhaps a record.

Rate Rise on the Home Front

Property insurance rates, kept artificially low by state law for customers of state-subsidized Citizens Property Insurance and for private company customers by below-market backup insurance, will be rising in 2009. After Gov. Charlie Crist and the Florida Cabinet saw that the state’s catastrophe fund — the backup insurer for Citizens and private sector property insurers — wouldn’t have been able to sell enough bonds to meet its obligations in the event of a monster storm because of the credit crisis in 2008, some shifting back of the risk to more expensive private reinsurers seems inevitable. “It will probably be more expensive than the state was able to sell (CAT fund reinsurance). The way the state has been dealing with this has been not allowing private companies or Citizens to pass along the cost of reinsurance in rates,” says Gary Landry, vice president of the Florida Insurance Council, an industry group.