Northwest Florida’s banking industry is on the rebound

Local banks have suffered through some of the worst financial times in memory, but signs are growing that the worst is behind them.

In 2010, Florida had the dubious distinction of having more bank failures than any other state in the nation — 29. The next closest state was Georgia, with 21.

In fact, just five states that year — Florida, Georgia, Illinois, California and Washington — accounted for 57 percent, or 89, of the nation’s 157 bank failures.

The “why” of it is pretty easy to understand.

During the global economic meltdown of the Great Recession, Florida was hit doubly hard as the housing industry collapsed and banks were left holding mortgages on devalued properties. In Northwest Florida the problem was compounded by businesses failing because of fallout from the oil spill.

“We are a reflection of the economy,” said Alex Sanchez, president and CEO of the Florida Bankers Association. “So goes the economy, so goes small business and the banking industry.” To truly comprehend the dramatic impact this all had on the banking industry, all you have to do is look at the numbers.

From 2002 until 2008, Florida lost five banks that failed to maintain their profitability. Between 2008 and 2011, 56 Florida banks went under.

That’s the bad news. But here’s the good news. By March of this year there had only been two Florida bank failures (neither in Northwest Florida), a sure sign to some that the state’s banking industry is on the rebound. It is slow, to be sure. But banking officials and industry analysts are optimistic, buoyed by some positive economic indicators.

For instance, in 2011, there were fewer bank shutdowns — plus higher ratings for the state’s banks. While still lagging nearly 40 percentage points behind the U.S. average, 26 percent of the state’s banks earned “recommended” status (earning four or five stars) from Bauer Financial, an independent bank rating firm in Miami.

That represented an 8 percent increase over the previous year.

“The good news would be that we did peak out,” Jeff Atwater, Florida’s elected chief financial officer, said of the state’s bank failures. “This year, I’m hopeful we’re below 10 (failures) and on our way back to far better times.”

Atwater noted that throughout the financial crisis Northwest Florida experienced fewer troubled and failed banks than other regions of Florida, particularly South Florida. Since 2009, there have been eight bank failures in Northwest Florida.

But the real recovery for the state and region is likely to be determined mostly by the pace of the housing and real estate recovery.

“Half of our banks in Florida this past year (2011) were not profitable,” said Atwater. “But two years ago, only 25 percent were profitable … 2010 was the worst bank failure year in our country.”

Your Neighborhood Banker

Some of the banks hit hardest during the Great Recession were community banks, the small institutions that provide the loans for the neighborhood barber to put in an extra chair, for a local store to expand into the empty space next door or for the town’s historic bed and breakfast to renovate.

“In areas where we have branches, we have seen the dying out of some community banks,” reflected Joshua Scribner, vice president of retail operations for Doral Bank in Panama City. “Some of those community banks that had been growing had real estate loans … and larger commercial banks began taking them over.”

Yet in the midst of the downturn, some community banks got their start.

Prime Meridian Bank of Tallahassee, which opened in October of 2008, has a five-star rating from BauerFinancial.

Doral Bank set up for business in Panama City in the late summer of 2010. It has five offices in Northwest Florida — four in Bay County and one in Pensacola — and a lending office in Tallahassee.

Summit Bank opened in Panama City in April of 2008 and then opened a Pensacola branch the following year.

Prime Meridian CEO Sammie Dixon credits the bank’s success to the fact “we worked our tails off. Whether you want to call it timing, luck or the grace of God.”

But the lending climate is tough. Not a lot of businesses are looking to expand. There are historic levels of cash sitting on company balance sheets, and there’s an uncertainty in the regulatory climate. Dixon calls it the “perfect storm” for inertia to set in. To counter that, he said the banks must look for “opportunities” to thrive.

“I don’t know if anyone has the perfect roadmap for what a community bank looks like in one, three or five years. There is no perfect model out there,” he said.

In the meantime, community banks are working to remove the black eye they got during the banking crisis.

“Other than we both take deposits, are Prime Meridian Bank and Bank of America … or Lehman Brothers or Bear Stearns … anything alike?” Dixon asked. “The industry has gotten a major black eye because of the media.

“Every time we talked about a financial instrument that went bad … whose last name created the problem, sold the problem and perpetuated the problem? Mr. Bank. We all got grouped together.”

Scibner said that Doral is focusing on involvement in the community and working with its neighbors to build confidence in the bank.

“We are entrenched,” he said. “Our employees are on local boards and councils. Branch managers are encouraged to be involved in civic or charitable activities. We have community grills.”

A special niche for Doral, he added, involves catering to the customers of the small community banks that were taken over by the larger commercial banks — hoping to lure them back.

In the meantime, consumers have become smarter about finances and financial institutions. They are immersing themselves in information about their banks, even checking on bank ratings.

“People have become very astute,” said Scribner.

At Summit Bank, the concierge-style services that are provided, especially to businesses, have led to it being described as a “boutique” bank. With plenty of local resources at its back, last December the bank assumed the assets of and some liabilities of Crestview-based Premier Community Bank of the Emerald Coast.

CEO Andy Stein said the bank targets the people it wants to serve and is “looking for entrepreneurs who are successful.”

“We’re in a market where wealth is derived from entrepreneurship. By not looking and acting like a traditional bank, we ensure we can provide the high-end service and consultation the customer needs.”

Banking Choices

While the term “bank” is generally used when talking about financial institutions, businesses have a choice of who they want to have handle their finances.

There are the large, national banks with hundreds of branch offices throughout the nation. There are the smaller community banks. And there are credit unions.

Banks have investors. Credit unions have members.

“Our industry came through in better shape I think than our banking counterparts, in large measure due to the fact that our capital system is inherently different,” explained Cecilia Homison, CEO of Florida Commerce Credit Union, which has about 39,000 members.

“Unlike banks, we capitalize over time. If we get hit with something, we can’t get more money in. That discourages more risk-taking because there is no safety net,” she added.

“While we are a financial institution, we are a not-for-profit. We want to maintain health to benefit our members, not the stockholders. We serve different purposes.”

David Tuyo, CEO of Pen Air Federal Credit Union in Pensacola, said the credit unions have admitted many new customers who grew leery of big banks — or couldn’t get bank loans when they needed them. Credit union membership hit a record number in 2011, adding 1.3 million new customers. Growing assets enabled the credit unions to loan money, including to businesses, when banks couldn’t.

“In a healthy economy, things are easy. Sometimes in a downturn you have to make a bet on people,” explained Tuyo. “We loaned more money each year during the downturn. Others ran from the problem … we continued to loan more money and help people.”

Pen Air, which has received a five-star rating from BauerFinancial for 86 consecutive quarters, has 16 branches and is adding two this year. It has 300 employees and has continued growing through the recessionary years. Tuyo says the credit union is seeing increased activity across the board, including construction loans.

Another major difference between banks and credit unions concerns taxes. Banks pay corporate taxes, credit unions are exempt. And that’s a bone of contention … for the banks.

“The tax loophole needs to be closed,” said Sanchez of the Bankers Association. “A family of four pays more than a credit union … (which) does everything a bank does, but they don’t want to pay state and federal corporate income taxes. They say I’m attacking Mom and Pop credit unions, but I’m talking about (credit unions like) Suncoast, headquartered in Tampa, which has $6 billion and offices in 23 counties. That’s bigger than our community banks.”

Added Tuyo, “Credit unions did not cause any losses, nor cost taxpayers money. We had some failures that we took care of ourselves. They focus on profits, we focus on people. We are concerned with members, not shareholders.”

We Want to Lend

“There’s a pretty decent appetite for banks to lend,” said Scribner.

But only certain borrowers need apply.

“It used to be an excessive appetite for any loan without documentation. Now, the propensity for risk has dropped a good bit. We are all looking for the same types of loans — cash flowing, performing property, not speculative real estate,” he added.

Still, there isn’t a rush to the loan office yet.

“We’re not out of the woods yet,” said Sanchez. “We see some light at the end of the tunnel, but the bottom line is there still isn’t a great demand for loans. In a recession, small businesses are just trying to survive.”

David Mann, SunTrust region president and CEO for North Florida, agrees, saying businesses are still focused on cutting expenses and building cash reserves — not on expansion and acquisition.

“If I look at our existing customer base today, the volume seeking funds for expansion is way below 2005–2007,” he said. “We’re seeing some evidence of it coming back, but I still see companies coming in focused not on survival but on being conservative and efficient in terms of expansion.”

SunTrust, one of the 10 largest banks in the country with 1,800 branches, including 80 in North Florida, is making loans available. Indeed, while lending dropped Mann said it “was still significant” during the economic crash years of 2008-–2010. Today, he added, those seeking loans should first make sure they are well positioned to make the request.

Mann recommends having a strong, detailed business plan that ideally would have been reviewed by an accountant, an attorney and/or a business mentor. It should address how the business can generate cash and include financial statements and the collateral needed to secure the loan. In other words, if the bank has to take it back, it wants to make sure the business will make money.

“And make sure they have a good personal credit rating,” he urged. “There is money available today but you need a good credit rating to access that resource. It is important for a person to show the willingness and ability to repay the debt.”

Over Regulated?

Just as they and the nation are trying to climb out of a financial funk, banks of all sizes and credit unions find themselves facing a new challenge: The Dodd-Frank Act. The heightened federally-mandated regulatory measures are a direct result of the financial meltdown. It doesn’t matter who caused it or how large the bank or credit union.

They all must now adhere to new rules that could eventually number in the hundreds.

The bottom line is that banks will need to have compliance officers to make sure the new rules are being followed. Not a tough assignment for the larger banks, which probably already have people in those positions. But, for the average community bank, which might have 37 employees, it’s going to be more of a burden.

“You’ll have more people checking boxes on regulatory forms than you’ll have out on the street creating revenue,” warned Atwater.  “It’ll be harder for community banks to carry that overhead expense. It means more money spent in the bank than is going to be returned to shareholders, which means there will be fewer people interested in investing.

“They’re applying (the law) to the institutions that were never causing … the concerns that led to the crisis.”

“Overkill” is the word that Atwater uses for Dodd Frank when it comes to community banks.

On this, at least, the banks and the credit unions agree.

“I’ve been in the business for 30 years, and it’s one of the most complex pieces of legislation ever written,” said Mann. SunTrust has spent time and money to build its compliance team, but he added, “fortunately, we are in a position to do that.”