Florida Is Back and Its Banks Are Squaring Off

John Corbett helped start CenterState Banks back in 1999. Being based in tiny Davenport, Florida, smack dab in the middle of nowhere 45 minutes south of Orlando, was a curse until real estate prices imploded, bringing down much of the state's banking industry.

"The interior doesn't boom-and-bust as much as the coastal areas," he explains. "We didn't have nearly the exposure to speculative land development that other banks did."

With most Florida banks either too damaged or too afraid to do much, Corbett's team opted to be aggressive. CenterState raised capital, acquired six failed banks from the Federal Deposit Insurance Corp. (plus two others that came with loss insurance) and bought up the remains of an out-of-state correspondent banking operation to generate some fee income.

Last year, CenterState did two (relatively) healthy bank deals, and now boasts $3.9 billion in assets, $3.2 billion in deposits and 58 branches scattered around 20 counties. That makes it the seventh-largest Sunshine State-based bank.

"The goal is to be the No. 1 Florida-headquartered bank in the markets we serve," says Corbett, chief executive of CenterState's banking unit. "If you can reach that scale, there's a brand awareness that can be powerful."

The crown is there for the taking — not only on a local-market level, but statewide — if only someone was willing to take it.

Seven years after a real-estate meltdown that helped spark a global financial crisis and left the state's banking industry in shambles, Florida is back to outgrowing the rest of the country. But the continued absence of a state flagship institution capable of providing leadership and training that benefits its smaller kin is a regular point of discussion.

"For Florida, the nation's third-most-populous state, to not have a statewide bank is considered a travesty," says David Seleski, CEO of the $2.3 billion-asset Stonegate Bank in Fort Lauderdale.

"It's created a vacuum and a void that needs to be addressed," adds Kent Ellert, CEO of the $6 billion-asset FCB Financial Holdings in Weston. FCB, which used private-equity backing to roll up nine banks under the Florida Community Bank label and last August IPO'd, is one of the few banks to publicly aspire to the mantle. Ellert sees FCB as a natural successor to the former Barnett Bank.

"We're the only bank of our size that's a Florida pure-play," he says. "We're replicating the Barnett model by marrying the financial horsepower of a larger national platform with the entrepreneurial expertise of local bankers."

At present, however, FCB has just 52 branches in the southern half of the state and market capitalization of less than $1 billion. At the very least, it's a long ways off.

Florida is a real estate state, powered by population growth and influenced by the rest of the country at least as much as it influences things elsewhere. During the recession, for the first time in anyone's memory, it actually saw net outflows of people.

"If you can't sell your house in New York, you can't buy one in Florida," says Stephen Scouten, an analyst who covers Florida banks for Sandler O'Neill & Partners.

During the crisis, housing prices fell by 50% in some markets, and took down plenty of banks with them. Since 2008, 69 Florida institutions have been seized and sold by the Federal Deposit Insurance Corp., including one earlier this year. About 100 others have sold themselves — most at distressed prices. In total, the number of banks has fallen from 317 before the crisis to below 180 today.

Now, folks are returning. The state is adding 800 residents per day, according to the Census Bureau, and in December passed New York as the third-most-populous state in the country, with close to 20 million people. Business is booming.

Housing starts are projected to hit 111,000 this year, up from 83,000 in 2014, according to the University of Central Florida, and all those half-finished condos along Miami's Brickell Avenue — "see-throughs," in the local parlance — have been completed and sold, with more on the way.

The state unemployment rate, at 5.8% in February, is now lower than the national average. JPMorgan Chase predicts the state's economy will grow 4.2% this year, more than double the national rate. Lawmakers in Tallahassee are giddy over this year's projected $1.8 billion budget surplus.

"If you dropped someone in the middle of Miami or Tampa and told them there was a horrific recession there three years ago, they'd think you were insane," says Stonegate's Seleski. "I've never seen an economy turn so fast. We're at full employment. Businesses can't find people. Property values are up significantly, restaurants are full and you see cranes on the skyline again."

The rebound has made it fashionable for Florida bankers to once again talk about market share, growth and performance, instead of mere survival. The state's banking industry earned a return on average assets of 0.51% in 2014, according to Allen C. Ewing & Co., a Jacksonville investment bank. Nonperformers as a percentage of assets shrank 30% from a year earlier, to 2.04%.

All this also has rekindled talk of creating a statewide banking franchise reminiscent of Barnett, a homegrown challenger capable of going toe-to-toe with the out-of-state giants that dominate the local landscape.

For now, Bank of America and Wells Fargo, each with more than 600 branches and 15%-plus market shares in the state, are the biggest players. Third-place SunTrust Banks owns 500 branches, and JPMorgan Chase almost 400. A host of smaller regionals from slower-growth Midwestern and southeastern states, including PNC Financial Services, Fifth Third Bancorp, Hancock Holding Co. and Home Bancshares, have seized upon the opportunities presented by the crisis to gain stronger footholds here, while south Florida has become a hotbed of foreign investment.

"There's a better opportunity for growth there," says Daryl Byrd, CEO of Lafayette, La.-based Iberiabank. The $16 billion-asset company acquired three failed Florida banks from the FDIC, has bought three more the old-fashioned way, and now has $2.6 billion in Florida deposits. "But it's more about diversification for us. We don't want to have too many eggs in any one basket."

Some banks have capitalized more than others. Pittsburgh-based PNC jumped from $46 million of Florida deposits in 2008 to $7.2 billion and 196 branches in 2014, according to FDIC figures. Home, based in Conway, Ark., grew from nothing to $1.5 billion in deposits and 49 branches over the same period.

In total, out-of-state banks control about 75% of deposits — a fate typical of many smaller states, but not those as populous as Florida. The biggest bank actually based in Florida, EverBank Financial, is an online institution that reports all of its deposits as in-state, but actually gets them from all over.

The biggest bank with a branch network, Miami Lakes-based BankUnited, boasts less than 3% of the state's deposits. CEO John Kanas, former head of North Fork Bancorp, once talked openly of building a statewide franchise, but has since reassessed.

The remainder of locally based institutions is led by a grab bag of upstart community banks in the $2 billion to $6 billion range — including the likes of CenterState, FCB, Capital City Bank in Tallahassee, City National Bank of Florida in Miami, Bank of Tampa, C1 Financial in St. Petersburg and Seacoast National Bank in Stuart.

Below that tier is a glut of smaller community banks, including 140 with assets of less than $500 million. Many of them were started in the first half of the 2000s, when charters were easy to come by and capital requirements weren't as stringent. The idea of building a bank and then selling for a nice profit was derailed by the crisis, and now they're stuck.

Ken Thomas, a Miami-based independent banking consultant, calls Florida the ultimate "banking colony," devoid of any serious strong local players. "The major decisions affecting Florida banking aren't made in Florida. They're made in boardrooms in New York, Charlotte, San Francisco, even overseas," he says.

Thomas attributes last decade's real estate lending problems, in part, to a "lack of banking talent" caused by the loss of big banks in the state. "Your big banks are like universities. They create a lot of good bankers," he says. "When you don't have a big local bank, you lose that training element.

"There's really no such thing as ‘Florida banking' anymore," he adds. "Instead, it's ‘banking in Florida.'"

The state's community bankers argue they still play an important role in the local economy, and they do, especially when it comes to small-business lending. "Entrepreneurs still want to work with a bank that makes local decisions," Corbett says. But even they will concede a certain level of disgust that there's not at least one sizable bank to play the role of state flagship.

Once upon a time, Jacksonville-based Barnett held the title of "Florida's bank," with some $40 billion in deposits and a branch within 10 miles of 90% of the state's population. Barnett was sold for $15 billion to NationsBank (now Bank of America) in 1997.

Since then, there's been plenty of talk about creating a modern-day Barnett. But for several reasons — including regional variations, increased regulatory scrutiny, competitive dynamics and the sheer attractiveness of Florida as a long-term growth market — piecing together a statewide franchise nowadays is more challenging.

Florida has changed a lot since the days of Barnett, and so has banking.

"I got paid a lot of money at North Fork for putting dots on a map," Kanas says. "Today, people are migrating to technology; branches aren't as important for distribution."

Florida tends to look and act more like four or five distinct states than one big market. The variety offers something for every banker's tastes, and encourages broad generalizations, but the cultural and operational challenges can make the idea of owning a true statewide franchise less compelling.

South Florida, from Miami-Dade up to West Palm Beach, is one of the most cosmopolitan areas in the country. With its dynamic immigrant population, a steady influx of northeasterners and 40% of the state's deposits, it's been the engine powering the state's rebound. But its foreign influence feels a little too exotic and risky for some bankers.

The West coast, from Naples to Tampa, is more genteel, attracts a high percentage of visitors and retirees from the Midwest, and is a strong wealth-management market. Orlando is a tourist mecca, and hotels have been taking advantage of low-cost loans to upgrade en masse; it's also a strong C&I lending market.

Jacksonville, a port and industrial center, is a relatively healthy C&I lending market too. The rest of north Florida, across to Pensacola, is by the admission of the bankers who work there, slower-growth hayseed country — agriculture, state government and universities, less dynamic, more like southern Georgia than southern Florida.

BankUnited has $18 billion of assets in the state. Kanas, who once talked about building a modern-day "Florida's bank," has since scaled back ambitions for blanket coverage. Smaller markets, particularly in the north, don't hold much appeal, he says, especially given the explosive growth in south Florida. "We're being very careful, and expanding our footprint as the market speaks to us," Kanas says.

Bill Smith, CEO of the $2.6 billion-asset Capital City Bank Group, harbors similar sentiments, only in reverse. His 120-year-old bank has 60 branches in the northern half of the state, as well as a few in southern Georgia, and is generally regarded as one of the strongest lenders in the state. It never took money from the Troubled Asset Relief Program, survived the crisis in good shape, yet deliberately chose not to move on the south during its moment of weakness.

"I don't wish I was down there," Smith says of South Florida. "I like the stability of our markets, and we're not sure the personal touch we provide would sell that well. The people who are moving there don't have roots."

Despite their differences, Florida's bankers are a tight-knit, generally collegial group. They swap war stories at Florida Bankers Association meetings, and share a pride in the industry's recovery that only enduring tough times together can inspire. 

In a state likely to see more consolidation, bankers place a premium on keeping lines of communication open — and with good reason. While the economic revival is celebrated everywhere, many Florida institutions are still grappling with problem assets; all must contend with higher compliance costs and are struggling to make money.

Loan demand is up, but the composition of loan portfolios — more commercial loans, fewer backed by real estate — has changed, and customers are more price-sensitive than ever. Anecdotal evidence suggests that the bigger out-of-state banks with lower borrowing costs are willing to buy good relationships with lower rates, leaving less desirable loans for small banks that can't afford such strategies.

W. Allen Rogers II, a managing director at Allen C. Ewing tells of one larger out-of-state bank he knows that's eager to grow in Florida. "The treasurer will call and say, ‘I've got $75 million of really cheap money. Lend it out — even if we take a small loss, let's get the business,' " he says. "Community banks can't do that. They need the spread to survive."

Florida's status as both an epicenter of the crisis and a major battleground in the government's wars on drugs and terrorist financing means the state's banks also face tougher regulatory scrutiny, and higher compliance costs, than those elsewhere.

The state's financial institutions have been subject to nine enforcement actions related to violations of the Bank Secrecy Act's anti-money-laundering provisions since 2008. Last November, North Dade Community Development Federal Credit Union, a five-employee shop with just $4 million in assets, was shuttered after it was found to have wired nearly $2 billion to 56 different money service businesses in Latin America and the Middle East. "No other state's banks get anywhere near the amount of regulatory enforcement that Florida's banks get," Thomas says.

With revenue pressed and costs rising, Florida banks with less than $250 million of assets earned a return on average equity of 4.29% in 2014, says Allen C. Ewing CEO Ben Bishop, compared with 7.65% for banks of that size nationally.

"A lot of bankers who survived the recession felt like they did the hard part," Bishop says. "But now they're finding it very hard to grow. They don't have enough capital, the best loans are taken by the big banks, and the compliance costs hurt returns." Raising capital would help, but it takes a compelling story for a community bank to attract investors.

It's a market that is screaming for more consolidation, and that, ironically, is perhaps the greatest impediment to building a statewide franchise in Florida today. It might be prone to busts, but the booms of Florida banking make it too attractive for a growth-hungry bank from elsewhere to ignore.

Of the 17 deals in the state announced since the beginning of 2014, 11 of the buyers were from someplace other than Florida. And they've proven willing to pay up. Wayne, N.J.-based Valley National Bancorp's purchase of the $1.7 billion-asset 1st United Bancorp in Boca Raton was priced at 1.87 times tangible book value, while Home's deal for tiny Broward Financial Holdings weighed in at 1.99 times tangible book.

Bishop predicts "a flurry of M&A deals" in the next few years, most of them either in-market mergers-of-equals — putting two $250 million banks together — or out-of-state banks looking to cash in on Florida's growth potential. The bigger banks domiciled in the state might make some deals as well, but they're just as likely to be prey for someone from the outside looking to solidify their market position.

Seacoast, FCB and Jacksonville Bancorp all have private-equity owners that are rumored to be looking for an exit. CenterState doesn't have private equity behind it, but if someone makes Corbett an offer too good to refuse, he'd feel compelled to sell too.

"Unless someone takes away the sunshine, Atlantic Ocean and Gulf of Mexico, Florida will always win," Bishop says. The state's banks are just along for the ride.