Managing Editor
Talking about today’s banking struggles, seasoned investment banker Ben Bishop brought up what anyone over the age of 50 likely remembers with a shudder: “The S&L debacle.”
Bishop recalled a long-ago sales visit to a founder of Jacksonville-based Winn-Dixie Stores Inc.
“I was told to call on J.E. Davis, a very astute investor,” said Bishop. “I was in my 40s and he addressed me as ‘son.’”
Bishop tried to sell Davis some savings and loan stock.
“Anyone who buys an S&L stock is a fool,” said Davis, not known to waste words or money.
Bishop, speaking to members of the Association for Corporate Group on Thursday, used the anecdote to relate the perplexing condition of community banks today.
“I have never experienced or seen anything like what we have been going through,” he said.
Bishop, chair of Allen C. Ewing & Co. and the recognized area expert on community banking, said the savings and loan industry operated from 1933 to the 1980s before collapsing.
The industry survived for decades, but “was built on the faulty premise that there would always be a spread between short-term and long-term interest rates.”
It’s much more complicated, but in brief, savings and loans took in deposits and made long-term mortgages. But interest rate changes and other factors disrupted the industry, and it didn’t survive. The savings and loan crisis of 1986-1995 “produced the greatest collapse of U.S. financial institutions since the Great Depression” as 1,043 thrifts, as S&Ls also were called, failed.
Many of today’s community banks are failing, merging or struggling under what Bishop calls a “perfect storm” of conditions. Community banks are independent, locally owned commercial banks that take in deposits and make loans within the communities they serve.
First, said Bishop, with low interest rates and money to spend, “banks went into a growth mode and everybody benefited by how fast the banks grew.”
Second, “political sponsorship” of homeownership “led to lowering of underwriting standards.” The goal, he said, was “to help everybody in the United States to buy a house,” with little to nothing down.
“It’s noble in nature, but it violates common sense,” said Bishop.
Housing took off.
“Everybody thought it was wonderful and everybody went on a seven-year high,” he said. “Then the bubble burst.”
As a result, the housing market collapsed as people couldn’t afford to pay their mortgages and were foreclosed or walked away, leaving lenders and banks holding the keys to both the loans and houses. Housing values dropped around 25 percent.
Community banks greatly suffered if they didn’t adjust their business and lending plans.
Bishop said failed banks nationally are grouped in areas of highest growth, which means Florida was hit hard. He said 35 percent of the banks in Florida are now operating under a memorandum of understanding with federal regulators.
“What a startling change” he said.
In what Ewing & Co. titled “The Consolidation Cycle - U.S. Banks,” Bishop’s presentation showed that of almost 14,000 banks in the United States in 1992, there were just 8,000 in 2009 and Bishop predicts 7,000 by the end of the year.
In Florida, the 752 banks in 1976 merged or dwindled into 286 by last year and Bishop predicts 225 within a few years.
Those that are troubled are subject to FDIC takeovers, forced mergers, mergers of equals, or “whatever.” In other words, there are more to come.
Bishop said the average community bank carried assets of $150 million to $200 million in Florida, but those surviving will need at least $500 million in assets.
“They’ve got to be very, very good,” he said.
For the bad news, “our Jacksonville banks as a group are in worse shape than any other major Florida city,” he said, referring to a performance measure called the Texas ratio.
Last year, 14 Florida banks failed, Ewing reported.
No Jacksonville-based banks were on that list, although two banks with area branches were taken over and a few area banks entered into agreement with regulators to raise capital.
In better news, there are some strong Jacksonville banks, particularly EverBank, with $8 billion in assets at the end of 2009.
“EverBank has a tremendous future,” said Bishop.
According to Ewing research, the six counties of Northeast Florida had 15 banks both in the third and fourth quarters of December 2009.
Ewing & Co. research shows that Florida has 23 banks with more than $1 billion in assets, and 50 with more than $500 million.
Of those 50 largest banks, Ewing reports that three are headquartered in Northeast Florida. In addition to EverBank, they are Jacksonville-based Florida Capital Group Inc. with $963 million in assets and St. Augustine-based Prosperity Banking Co., with assets of $935 million.
“For community banks to be competitive, to earn acceptable returns for their shareholders to attract capital and to achieve the higher efficiencies that larger banks have, we believe that community banks in future years should have assets of $500 million or greater,” according to the Ewing & Co. research.
Bishop called the process “very selective” but said there is a future.
“The banking industry will survive,” he said.
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