Florida Bank Goes Back to Basics in Pursuit of Higher Profit

NorthStar Bank is a little bank with big aspirations.

The $207 million-asset unit of NorthStar Banking in Tampa, Fla., is trying to improve itself instead of waiting for the economy to improve. Rather, the bank reversed strategic course and reinvented itself this year to boost revenue.

NorthStar, which once relied on its securities book to drive earnings, wants to add loans and customers, said David Stone, who became interim president and chief executive in January when Monty Weigel stepped down. Stone, a force for change since joining the board in April 2012, thought the bank could increase its profits by becoming a more traditional community bank.

Such efforts are starting to pay off. NorthStar's loan portfolio increased 12% in the first quarter from a year earlier, according to data from the Federal Deposit Insurance Corp. The bank is also looking to add roughly one branch a year for the "foreseeable future" to better serve the professionals and small businesses it is aiming to reach, Stone said.

NorthStar could at some point pursue a merger of equals, Stone said, but for now it is focused on improving its core banking.

"Loan demand for a bank like us you have to create it," Stone said. "You do that by people capitalizing on their contacts. In the past, there wasn't a desire to generate a lot of loan activity. You just have to take the handcuffs off. "

Stone will likely remain interim CEO until a replacement is ready to take over, he said. (NorthStar bank has a succession plan, though it has yet to publicly name its next CEO.)

The following is an edited transcript of a wide-ranging interview with Stone.

Can you discuss the strategic changes at NorthStar?

DAVID STONE: For the first six years the bank looked at the investment portfolio as the income driver. Previous management thought that should be the approach taken during the recession. We decided to change course in January and focus on growing the core banking assets and liabilities. Since the end of last year, we've grown the loan portfolio from $66 million to $82 million.

We also are in the process of opening another branch in south Tampa. That will be our third office. We have another office that opened in Belleair, Fla., last October. We think we've got a solid foundation to grow from here.

We've got a strong capital base, and we're basically problem free in terms of asset quality. We've got a group of lending officers that are very well connected in the Tampa market. It's a matter of letting them develop their contacts into business relationships.

Why did NorthStar decide to change?

We really weren't building a bank, per se. We weren't growing the deposit base. We weren't growing the loans. That's what a community bank is all about, gathering deposits and reinvesting it in the form of loans to professionals and individuals. [The board] got to the point where we all felt it was time to change and become more of a traditional community bank.

You don't often picture an interim CEO having so much latitude.

I'm probably more responsible for bringing about the change than anyone else because our board wasn't aware they were headed in a direction that a bank wouldn't typically go. It was a matter of a philosophy that made sense to me.

There was nothing wrong with the bank. It was profitable. But we hope it will be more profitable since we'll be generating earnings from a good loan portfolio where the spreads are much higher.

Was focusing on the investment portfolio the right strategy during the economic downturn?

I've always seen recessions as opportunities for community banks. Typically the large banks, when times get tough, turn the faucet off and run off their good customers as well as the bad ones. It is a golden opportunity for a good, strong community bank to pluck off good customers.

As you add branches, what are you looking for in terms of locations?

We're looking for a market with a heavy concentration of professionals, doctors, lawyers, accountants, CPAs, as well as established small businesses in areas where affluent people reside. Our bread and butter is established small businesses and professionals. We do a lot of business with doctors. We'd like to do more with attorneys. They have always been one of the best sources for business. Good law firms have transactions where they have to park money for a while.

What technology are you looking at for your branches?

We'll have state-of-the-art technology but we won't do the branches you're seeing today that have no people. The branches that have nothing but technology deal more with the masses and individual consumers. That is not our target market.

We want to deal with professionals and business people and they want to deal with someone they can talk to.

How is NorthStar dealing with added regulation?

It's an extra expense. We probably spend twice as much on compliance as we would have 10 years ago. It is probably going to get worse before it gets better.

The trade associations are doing everything they can to minimize the regulatory burden but it is a slow process. It is overwhelming with Dodd-Frank and everything else we have to deal with, such as the Bank Secrecy Act.

Up until this year, compliance duties had been somewhat fractured. But we now have a full-time compliance officer and a full-time BSA officer so we have centralized both of those functions.

Regulators seem to be paying a lot of attention to BSA. All banks should be concerned about BSA compliance. It's not rocket science. You just have to pay attention to it, and senior management has to take it to a level that some banks don't. We have somebody that reports to me internally and to the board.

You have to elevate it to a position of importance, and the board has to be committed to it as well. 

With your de novo status ending, do you have any plans for acquisitions?

We have decided not to pursue or consider any kind of merger. We'd like to do a peer merger at some point to achieve scale. However, we need to build some strength in our balance sheet before we start negotiating something like that.

Right now, we wouldn't be negotiating from a position of strength because we don't have the customer base. A solid customer base on both sides of the balance sheet creates value and we haven't been doing that in the past.

We've had a lot of banks approach us to do mergers but, in almost every case, we would cede control to another organization. Some banks look at us just because we have a strong capital base. Others look at us because we have a low loan-to-deposit ratio. There's a lot of room to grow loans but we are going to grow the loans ourselves.

Why the interest in a merger of equals?

We got into [banking] to stay in the business. We didn't get into the business just to sell. You will see a lot of merger activity over the next couple of years. A lot of existing community banks will disappear into larger institutions.

We think that is an environment we can capitalize on and become the dominant community bank in the Tampa Bay market over the next few years.

Is there a certain asset size you are looking to reach?

The first level would be $500 million. That's about the level where you can achieve some scale. The next level is $1 billion. If you're profitable at $1 billion, without problems, you can really generate some returns for your shareholders.

You're in a position to be an acquirer and continue to expand your markets. It's hard to do that at our size. You can start to think about it at $500 million, but even then it isn't easy. We think we can make a go of it by staying the course.

Do you have any predictions for the banking industry?

It is still a tough environment. Interest rates make it tough. Net interest margins are still thin. However, I anticipate that … by the middle of next year interest rates may start rising. When that happens I think margins will start widening. But for right now that part of the business is tough.

I think we'll have economic growth for the foreseeable future. How long that lasts nobody knows. I think the outlook is good. It's tough for community banks. You can't achieve economies of scale until you reach a certain size and, with all of the additional compliance expense, it makes it difficult. But for those that stick to it, you can make it work. It just isn't as easy as used to be.