Small Banks, CUs That Survived Great Recession

So many banks fell and for essentially the same reason: bad loans. Regular closings became a ritual of the Great Recession — in Naples, Florida, and across the country.

“When people didn’t repay their loans, that’s when our banks had to write off these loans and it hit their capital. Then you know what happened after that,” said Alex Sanchez, president and chief executive officer of the Florida Bankers Association.

The Federal Deposit Insurance Corp. swooped down on the troubled lenders and seized their assets, putting those assets into the hands of another bank in waiting. To unsuspecting customers, the change seemed to happen overnight, with the flick of a switch.

From 2007 to 2012 more than 450 banks failed across the country, according to the FDIC.

In Florida, more than 70 banks folded during the recession and its aftermath. Small community banks suffered the most.

There are lingering effects: You don’t see as many community banks as a decade ago.

As of June 30, 2017, Florida had 95 state-chartered banks. There were more than 200 in 2007, according to the Florida Office of Financial Regulation.

The number of community banks in Lee County can be counted on one hand.

In Collier County, First Florida Integrity could soon be the only community bank left standing.

In August, the Lake Michigan Credit Union announced plans to acquire Naples-based Encore Bank and expects to close on the deal early this year. The credit union, with assets of more than $5 billion, opened its first Florida office in 2015.

The recession spurred new financial regulations that led to more consolidation in the banking industry and discouraged the opening of new banks, which must raise a lot more capital.

“The FDIC has basically gotten very tough across the board and that makes it very difficult for banks to operate because of these regulatory burdens. What happens is that so many banks just started selling out,” said Ken Thomas, a longtime economist and banking consultant based in Miami.

Most of the new regulations came from the adoption of the Dodd Frank Wall Street Reform and Consumer Protection Act, which President Donald Trump has vowed to “do a big number on” because he believes it’s too burdensome for all banks, especially smaller ones.

Federal lawmakers saved some of the nation’s largest banks with the Emergency Economic Stabilization Act of 2008, which authorized the U.S. Treasury to supply banks with cash by purchasing up to $700 billion in distressed assets, especially mortgage-backed securities (the amount was later capped at $475 billion).

The government doled out $439 billion and recipients have returned $390 billion a tally kept by ProPublica shows.

About 85 percent of banks that failed in the U.S. from 2008 to 2011 were smaller ones with assets of less than $1 billion — and the majority were concentrated in 10 states led by Georgia and Florida, according to a report by Face the Facts USA.

Lee and Collier counties saw their fair share of failures. There were 10 from 2009 to 2013, stretching from Marco Island to Cape Coral.

One of the most high-profile collapses involved Naples-based Orion Bank, which ended in prison sentences for its ex-CEO and president Jerry J. Williams and two other bank employees for their role in a fraud conspiracy.

The scheme — orchestrated by Williams — involved illegally raising more capital for the bank and selling off bad loans to a borrower to make Orion appear in better financial shape than it was so regulators wouldn’t shutter it. The bank saw a wave of defaults on big construction and development loans after the real estate boom went bust in Southwest Florida.

After spending nearly six years at an Alabama prison camp and six months at a halfway house to help him prepare for life on the outside, Williams was released Oct. 30. Court records show he’s settled in Brentwood, Tennessee, where he’s still under supervised probation.

In some cases the FDIC waged legal battles against directors and officers that it alleged had a hand in their bank’s downfall because of “unsafe and unsound” lending practices. That included Williams and leaders with Immokalee-based Florida Community Bank, which regulators accused of being “grossly negligent” and “reckless” in operating the local bank after amassing an “extreme concentration” of acquisition-and-development loans that was “quadruple that of the average bank in its peer group.”

Edison National, the oldest locally owned and operated community bank in Lee County, never faced the threat of failure.

Why?

Seasoned bankers and a mission of safety and soundness that started on Day One, said bank president Robbie Roepstorff.

“We just stuck to basic, solid principles of banking and we managed the bank,” she said. “We’ve always been on the more solid, conservative side of banking.”

From the recession Roepstorff said she hoped to see the regulation of financial institutions, including banks, thrifts, credits unions and mortgage brokers, brought under one agency.

“It would have kept the whole financial industry much stronger,” she said.

Garrett Richter, First Florida Integrity’s president, remembers how tough it was to open a bank during the recession. He and Gary Tice, who serves as the bank’s chairman and CEO, started the institution — originally under the name First National Bank of the Gulf Coast — in 2010. They sped the process by acquiring another bank, Panther Community, because regulators were holding up their application for a new charter.

Richter and Tice, who had started and sold First National Bank of Florida, weren’t new to banking. They brought fresh capital and experienced lenders to the market who’d worked for them before — and unlike their competitors they had no bad loans, giving them an advantage.

The Naples bank has mostly grown organically through its own resources but has acquired several financial institutions since it opened. Those acquisitions included the failed Royal Palm Bank of Naples, with $87 million in assets.

Tighter lending requirements adopted in the aftermath of the recession impacted First Florida Integrity in many ways. It doesn’t offer residential mortgage loans because the business is “just over-regulated,” Richter said.

In Southwest Florida and across Florida and the country, banks are much healthier now. Bankers are more cautious about the loans they approve, requiring more money down and basing their decisions on real equity, not “phantom equity,” in overvalued property as they did leading up to the recession when home prices skyrocketed, Richter said.

“One of the components that caused the Great Recession is there was an abundant availability of money,” he said. “Banks were making lots of loans. They were motivated to make loans by government institutions like Fannie Mae and Freddie Mac and these loans were being packaged and sold to investors.”

Looking Ahead
Longtime Sarasota banker Jody Hudgins, now a chief credit officer for First Florida Integrity, said there are many lessons to be learned from the recession. For bankers, he said, there’s no substitute for experience in evaluating borrowers and their ability to repay loans.

“Too many times we have financed projects to borrowers with big financial statements and big tax returns that are 18-plus months old that are nothing more than a desperation move by the borrower because he will soon be out of cash and is desperate to make a successful project,” he said.

The key is understanding how a bank’s lenders get paid.

“Hopefully, we have gotten away from production-only goals for our lenders without any requisite credit performance metrics and claw back opportunities,” Hudgins said.

Doug Meschko, director of market research and a land broker for Land Solutions in Fort Myers, said times have definitely changed when it comes to lending.

He got a loan for a new home last year, putting down 50 percent, and his lenders still put him through a rigorous review.

“They don’t let somebody buy three condos with 2 percent down each like they did back then,” he said. “They are lending, but it’s a much more thorough process.”

Buying land is even tougher.

“There are more hurdles for land,” Meschko said. “There are very few people lending on land right now. It’s pretty much a cash game again.”

The good news? If another recession hits there’s more equity in the ground.

“There is a lot more staying power because people have a lot more in their homes and in their land,” Meschko said.

Many bankers changed careers as a result of the recession. Some have become stock brokers or sell financial insurance. Others made bigger job shifts or retired all together.

Employment in the financial sector fell about 29 percent from 2007 to 2011 in Collier County, but it has grown 27 percent since 2011, said Christopher Westley, director of Florida Gulf Coast University’s Regional Economic Research Institute. Lee County saw a drop of 28 percent from 2005 to 2011 — and since 2011 employment has increased 27 percent.

“Both counties are getting close to but have not yet reached the previous peak before the previous recession,” Westley said.

In Collier, average wages in the financial sector are much higher than a decade ago. In 2016 they were at $84,025, up from $69,667 in 2005, Westley said.

“It reflects how much capital has floated into the county since 2005. Those funds have to be managed and their purchasing power has to be maintained, which is what financial planners do,” he said.

In Lee County wages for “financial activities” averaged $59,985 in 2016, compared to $46,267 in 2005, Westley said.

“The wage increases seem less significant once adjusted for inflation,” he said.

Proponents argue deregulation could create more jobs here and around the country by making it easier for community banks to form.

“Community banks play a vital role in our economy,” said Sanchez, with the Florida Bankers Association. “We need community banks. Community banks give 50 percent of the small business loans in the United States and small business is what our economies are based on here in our country.”

Instead of a one-size-fits-all-approach, he said financial regulations need to be more tailored to the model and the risk profile of the banks, so they’re not so overly burdensome on smaller banks.

In the 15 years before the adoption of Dodd-Frank, the country saw an average of 130 banks started a year. Since 2011 the FDIC has approved 15 applications for new banks in the U.S. Several of those banks have not yet opened.

The first full-service national bank charter since the financial crisis went to Winter Park National Bank in Florida in October after its organizers raised $39 million in starting funds in a stock offering. Led by longtime banker David R. Dotherow, the boutique operation is focusing on corporate banking, serving “attorneys, doctors, CPAs, contractors and local small business entrepreneurs,” according to its website.

The financial crisis didn’t just hit banks.

Tampa-based Suncoast, Florida’s largest credit union, lost $76.6 million in 2008, $77 million in 2009 and nearly $30 million in 2010. Despite such big losses, the lender made a strategic decision not to cut employees or close offices during the recession, but employees took pay cuts, with senior ones getting the biggest ones, said Kevin Johnson, president and CEO.

The credit union continued lending through the recession and worked with its customers to modify their loans as they became troubled, which ultimately reduced its losses and built loyalty with its members that helped it survive, Johnson said.

Today, Suncoast continues to expand.

Suncoast is nearing the $10 billion asset mark and with that milestone will come more regulatory hoops, requiring the institution to add more employees in compliance. While President Trump is pushing for deregulation, Johnson said he recognizes it will be an uphill battle in Congress.

The experience from the last recession, he said, has Suncoast much better prepared for the next one.

The lesson to learn from the last financial crisis is to “guard against the temptation to become complacent about the risks facing the financial system,” said Martin Gruenberg, the FDIC’s chairman, in a speech at the Brookings Institution in Washington, a few months ago.

He noted the country paid a high price for not recognizing the magnitude of the risks it faced: Nearly 9 million people lost their jobs, more than 12 million homeowners faced foreclosure and millions of other households remained underwater on their mortgages for many years (Lee County held the dubious distinction as one of the nation’s foreclosure capitals).

Reforms have gone a long way to strengthen the country’s financial institutions, Gruenberg said, adding that large banking organizations “now operate with roughly twice the capital and more than twice the liquidity relative to their size than they did entering the crisis.”

FDIC-insured institutions reported a record $171.3 billion in net income for 2016, up 44 percent from 2011.

“It is now more likely that in the next downturn, large U.S. banking organizations will play a stabilizing role, rather than contributing to a deeper economic contraction,” Gruenberg said.

Community banks, he said, hold 13 percent of banking assets in the U.S., but account for 43 percent of small loans to businesses and farms.

He warned there are always challenges that could quickly change the outlook in the financial system from shifts in monetary policy to market corrections.