Stonegate Bank's foray into Cuba prompted Chief Executive Dave Seleski to take some precautions he wouldn't have learned about in any banking school's textbooks on risk management.
Just after Stonegate unveiled its plan to open an account for the Cuban government, Seleski hired police cars to park outside his home and the bank's Pompano Beach, Fla., headquarters for a few days.
"Some people are very opposed to doing anything with Cuba, just because of who's in power. That's just the way it is," Seleski explained. "We didn't know what the reaction would be, but when you're dealing with the safety of employees, you can't take a chance. There are a lot of crazies out there."
The decision in May to accept the U.S. State Department's request to provide a banking account to the Cuban Interests Section (the Cuban Embassy's name before its reopening this year) also forced Seleski to step outside his comfort zone.
Seleski founded Stonegate in 2005 and in the decade since has built it into a thriving, $2.3 billion-asset institution through a combination of prudent lending and opportunistic buying. Setting up a venture with Cuba had never been part of the game plan until State Department officials called Seleski out of the blue last spring.
"There are a lot of politics involved here and Dave told me that he didn't want to be in politics," said Chris Marinac, an analyst at FIG Partners, who has spoken with Seleski about Stonegate's Cuba venture.
Still, the 50-year-old Seleski sees the opening up of Cuba, after more than five decades of communist rule, as offering a world of potential for his bank. When President Obama in July announced the formal restoration of diplomatic relations, it raised the real possibility that Cubans could finally start to see the economic benefits of living in a modern society.
For the time being, Stonegate is providing Cuba with only a simple deposit relationship. Eventually, though, U.S. companies looking to expand into Cuba will need bank accounts there and Stonegate, as a first mover, would likely be in the running to land their business.
Moreover, if Stonegate is successful, other U.S. banks could be encouraged to form ties with Cuba as well, paving the way for more commerce between the two countries – and more opportunities for Stonegate.
"It's not an exclusive deal that we've got with Cuba and it's a big country," Seleski said. "The more banks that want to get into Cuba, the better."
Stonegate scored the Cuba account in part by having the right connections. A Florida businessman working with the State Department on strengthening ties between the two nations happened to be a Stonegate customer and recommended the bank to the State Department.
But it's safe to say that the government would not award such a high-profile assignment to any old bank. It didn't hurt that, over the past year or so, Stonegate has emerged as one of the best-performing community banks in Florida and the country. Its profits are soaring, its financial metrics are among the best in its asset class and, in mid-December, its stock was hovering near its all-time high.
Much of the credit for the bank's success goes to Seleski, who largely kept Stonegate out of trouble during the state's real estate bust and then took advantage of the upheaval by rolling up failed or troubled competitors.
With eight deals under his belt, Seleski has put Stonegate in the enviable position of controlling its own destiny. It now has the scale and the currency to continue acquiring smaller banks, if it so chooses. Or, as some analysts speculate, it could sell itself to a larger bank that's looking to bulk up in highly attractive markets in which Stonegate operates, including Pompano Beach, Miami, Naples, Tampa and Sarasota.
For building a top-notch community bank from scratch and positioning it to stay relevant in an increasingly challenging financial services landscape, Seleski has been selected as one of American Banker's three Community Bankers of the Year for 2015.
Much of Seleski's attention of late has been focused on the Cuba venture. He has visited the island nation multiple times in recent months and he says seeing Cuba in person is like stepping into a time capsule.
The hope is that Obama's decision to normalize relations will be the catalyst for fixing Cuba's crumbling infrastructure and bringing its economy into the 21st century, said Robert Macaulay, an attorney at Carlton Fields Jorden Burt in Miami who advises U.S. businesses on international transactions. But plenty more things must also happen.
Congress must lift the economic embargo on Cuba and that almost certainly won't happen until after next year's elections, Macaulay said. Many key Republican leaders in Congress oppose lifting the embargo, and those elected leaders who favor ending it are dealing with more pressing matters.
But with the business community "chomping at the bit to lift the embargo," Macaulay said there's good reason to believe that the two nations can reach a deal after the election.
Cuba must also prove that it can play fair, he said, noting that the Cuban military is well-known strong-arming private businesses into forking over a share of their profits.
"This also requires Cuba to keep a lid on corruption," Macaulay said. "There has to be a legal environment that investors can rely on."
Seleski is as surprised as anyone that Stonegate was tapped to help normalize relations between the two countries. While driving in the Miami area during a routine work day, Seleski received a cold call on his mobile phone from the State Department's undersecretary for Cuban affairs.
Prior to that call, Seleski had virtually no dealings with anything related to Cuba.
He'd worked in wealth management for SouthTrust Bank and for SunTrust Banks in the Miami Beach and Bal Harbour areas. He had managed branches for Compass Bank in South Florida; and he had been CEO of the Southeast Florida division of Florida Banks, a Jacksonville, Fla., company that's now part of TD Bank. At Stonegate, he knew of just one customer who had dealings in Cuba.
"We just had one customer that had any business in Cuba," he said. "We had no Latin American business. We're a domestic bank. That's what we do."
After getting the State Department's call, Seleski held a quick conversation with his board members, who quickly agreed that it "was the right thing to do" to help transform the Cuban economy.
"The same buildings that were there in 1960 are still there and nothing has been done to them," he said. "It's been an ordeal for the Cuban people."
In addition to providing a bank account to the Cuban Embassy, Stonegate has formed a correspondent banking relationship with Banco Internacional de Comercio in Havana.
The prospect of a nation of 11 million people casting off the restraints of communist rule, and being exposed to the American consumer culture, surely causes American entrepreneurs to dream of dollar signs. Seleski is cautiously optimistic that Cuba's emancipation will produce business leads.
"We're hopeful that, once the embargo ends, there would be some opportunity there," Seleski said. "If that happens, we would probably go through the same risk assessment we would with anything and ask ourselves, 'Would we want to get into that area?'"
Anna Barnard, an analyst at Sandler O'Neill, said it's too early to be giddy about Cuba's prospects.
"Stonegate will definitely pick up customers that they wouldn't have gotten otherwise" from entering Cuba, she said. "Cuba is interesting and it's certainly a differentiator for Stonegate. But I don't think it's quite as significant yet. I don't think we'll see an immediate earnings impact."
Others are more sanguine. Marinac said Cuba could end up being a gold mine of fee income for Stonegate and other banks, largely through debit card and ATM transaction fees, as well as fees from Cuban-Americans sending remittances to the island.
In November, Stonegate began offering a MasterCard debit card for use by U.S. citizens while traveling in Cuba. It is the first U.S. bank to let its cardholders make purchases in Cuba. It also plans to roll out ATM cards in 2016.
For Stonegate, the biggest win is likely to be on the deposit side.
U.S. businesses and nonprofits that seek to do business or promote development efforts in Cuba could very likely choose to deposit funds at Stonegate, in order to conduct their affairs on the island, Marinac said.
Those demand deposits could become extremely valuable in a few years, if and when Congress repeals the economic embargo, and if the Federal Reserve raises interest rates, Marinac said.
"We have to wait patiently, but this is a good call option on gaining additional business," Marinac said.
All of that is years away, however. Macaulay estimates it would take five years from the time the embargo is lifted to see a real impact.
"It wouldn't be like a bomb is dropped" on the day the embargo is lifted, Macaulay said. "But I think, within five years of the embargo being lifted, there could be a huge change."
A Well-Run Bank
In the meantime, Seleski's got a bank to run, and he's doing that very well.
Stonegate largely caters to professional firms and its strength, competitors say, is that it knows when to say "no." Other banks will make concessions to borrowers in order to win loan business, but Seleski has been a "tough competitor" in the south Florida market because he's been able to win business without caving in to borrowers' demands on price or terms, said Javier Holtz, chairman and CEO of the $328 million-asset Marquis Bank.
"They lead with service and certainty, instead of rate," Holtz said.
Stonegate has a branch in Coral Gables, where Marquis Bank is based.
That's evident in the trajectory of the bank's net interest margin. While most banks' net interest margins have been shrinking in recent years, Stonegate's has been rising steadily and now sits well above the industry average. Its net interest margin in the third quarter was 4.77%, compared to an industry average of 3.05%, according to Federal Deposit Insurance Corp. data.
One of Seleski's biggest fans is Lawrence Seidman, an activist investor who has a long history of being a thorn in the sides of bank CEOs. When asked to assess Seleski's tenure as CEO, Seidman said, "He's a great banker, great person."
Seidman, who's based in Parsippany, N.J., was one of the original investors in Stonegate when it was formed in March 2005 with an initial capital raise of $40 million. Seidman is now a Stonegate director. His 4.7% stake in the company is valued at roughly $18 million.
The quarter that ended Sept. 30 was among Stonegate's best. Its profits nearly doubled from a year earlier, to $6.8 million, and its efficiency ratio fell from 60.47% to 49.77%. Its return on assets and equity also increased significantly, to 1.19% and 10.1%, respectively, and its nonperforming assets, as a percentage of total assets, remained low, at 0.39%.
Marinac rates Stonegate's stock "outperform," saying that investors have undervalued its "superb core deposits in south Florida, which we feel are highly valuable and should be more appreciated."
Still, Stonegate is starting to appear on more investors' radar. In September, Stonegate for the first time appeared on Sandler O'Neill's list of small-cap all-stars, the investment bank's annual list of banks that are outperforming their peers.
Its shares are up roughly 16% in the past year, compared to a roughly 1.5% rise in the Standard & Poor's 500 Index over the same period.
At the time it put out its all-star list, Sandler O'Neill estimated that Stonegate's stock price-to-tangible book value ratio was 189%.
"The stock has continued to perform well and the investment community really likes it," said Sandler's Barnard.
Stonegate recorded loan growth of 46.9% for the 12-month period ending Sept. 21, according to Sandler O'Neill. That outpaced the median loan growth of 19% for other all-star banks. Stonegate's deposit growth of 36.5% for the same period was well above the median 14.3% growth for other all-stars.
Still Eyeing M&A
With its valuable stock price as ammunition, Stonegate is likely to continue making acquisitions in south Florida, with perhaps a bigger push into the Tampa area, Marinac said. Stonegate only has one branch in Tampa, which held $66.3 million in deposits as of June 30, according to the FDIC.
In the near term, Marinac said, future deals are likely to resemble Stonegate's two most-recent acquisitions of Florida Shores Bancorp in Pompano Beach and Community Bank of Broward in Dania Beach, Fla. Both had assets of around $500 million and Florida is chock full of banks in that asset class. At Sept. 30, there were 20 banks in the state with assets between $400 million and $600 million, according to the FDIC.
Seleski, who owns about 1.5% of Stonegate's common stock, agrees that more M&A could be in the works.
"We took some time off from acquisitions this year because my people were tired," Seleski said. "Now we're back looking again. Our stock is doing very well and we think that a lot of organizations would be interested in joining with us."
Ultimately, Stonegate is probably setting itself up to be acquired by a large regional or national bank, Barnard said.
"Most people view this one as a very attractive target because of their market and they're a high-performing bank," she said. She added, though, that Seleski has done such a stellar job running Stonegate that he could easily justify keeping it independent.
In the meantime, all eyes will be on Seleski's Cuban experiment, Marinac said that of all CEOs of banks he follows, Seleski is the one most likely to take such a calculated risk. It's a good bet, Marinac added, that it will turn out to be a risk that was worth taking.
"He has such a good sense of what drives value for shareholders," said Marinac. "He knows it's all intertwined."