Stearns Bank Finds Florida to Its Liking

Stearns Bank buys failed banks to serve as canaries in a coal mine. In Florida, the canary's doing just fine.

Stearns, a $1.3 billion-asset bank in St. Cloud, Minn., has purchased six failed banks across the country since 2008, in states like Arizona, Georgia and Florida, all whacked by the financial crisis.

The bank's strategy has left outsiders scratching their heads. "I am not sure what their strategy is, but I know that most people think they were buying failed banks to make a little money," said R. Brennan Ryan, a partner at Nelson Mullins in Atlanta.

While most companies use failed-bank deals backed by the Federal Deposit Insurance Corp. to either expand in existing markets or to move into new locales nearby, Stearns has taken a scattershot approach that many observers believe to be a mere revenue play, rather than a franchise builder.

In Georgia, for example, Stearns wound down its new additions, once rate-shopping depositors fled. But in Florida, it's ready to expand further.

"If you have intentions of growing out a platform you have to someone on the ground, rather than a thousand miles away, that is specifically focused on building that brand awareness. I think that is what they are recognizing now," Ryan said.

Indeed, a new hire, veteran banker Tramm Hudson, will lead Stearns' effort in the Sunshine State, managing two failed banks, with a bigger mission of building a franchise in the state.

"We did the acquisitions to see what the situation was like out there. We thought if they were a good fit, we would intend to stay," Norman C. Skalicky, the bank's chief executive, said in an interview last week. Now, "after doing all the work to get a handle on the loans, we are ready to hit the streets."

Hudson's appointment could change the perception of Stearns' acquisitions. He most recently was a regional president in Florida for Whitney Holding Group of New Orleans, which was sold earlier this month to Hancock Holding Co. of Gulfport, Miss.

Hudson said his first priority is to meld the remnants of First State Bank in Sarasota and Community National Bank in Venice into a cohesive operation. Although the banks have been operating as Stearns since their failures in August 2009, the integration has had some kinks.

"We need to build a cohesive group. There needs to be camaraderie," Hudson said.

A well-executed integration is critical to any successful acquisition, but it is particularly imperative in failed-bank deals, said Steven Reider, the president of Bancography, a consulting firm in Birmingham, Ala. It's also tougher in failed-bank deals because of how quickly the transactions occur.

"It is not uncommon in mergers to have integration issues. And it really is hard with failed banks because they are really hamstrung in their closing year," Reider said. "The biggest disadvantage to a failed-bank deal is that you don't have a lot of time to plan for culture problems. There is no due diligence. You can't pre-configure much."

The integration teams have also been consumed dealing with problem credits for so long that the bank will need a new loan underwriting culture there.

"You can only survive so long on loss-share agreements," Hudson said. "I am working on developing a sales culture. We are going to need to divide the bank into a 'good bank, bad bank' structure so that not everyone is tied to the desk working on problems."

Hudson added that he will also need to build some goodwill within the community.

"Candidly, we need to repair our reputation. We've taken over two failed banks, and there are disappointed customers," Hudson said. "We have some room to build and improve on our reputation."

Fortunately, Hudson will not have to worry about the added work of right-sizing the franchise. Stearns has whittled the Florida operations down to three branches from the 13 it acquired.

"We kept the strong ones," Skalicky said. "The other locations were not strategic or not profitable. We want to be as nimble as we can."

Hudson said that, once he is done with the repairs, he sees an opportunity in strategic FDIC acquisitions and organic growth, particularly in commercial lending.

"Florida is really the sleeping giant. It is an attractive state despite what is happening right now," Hudson said. "With all the bank failures, this area is starved for a business bank."