Community Southern Bank in Lakeland, Fla., has finally reached banking's equivalent of adolescence.

No longer considered a de novo, the seven-year-old bank is prowling central Florida for acquisitions, says President and Chief Executive Michael Micallef. Branches and banks are possible targets for the $220 million-asset bank.

Community Southern has the funds — its Tier 1 leverage ratio at June 30 was 13% — to make deals, though concerns about banking's future capital requirements have kept Micallef on the sidelines. So the bank has stayed busy by opening a loan production office in Orlando, Fla., and buying a branch of a failed bank.

Still, the bank faces many of the same challenges that have limited organic growth at other institutions, Micallef says. The following is an edited transcript of a recent conversation with Micallef.

You recently received regulatory approval to form a holding company. Why is this important?

MICHAEL MICALLEF: The holding company will give the bank flexibility. We could establish an employee-stock option plan. It will also give us the ability to raise capital at the holding company level and be able to downstream capital to the bank. It also makes acquisitions easier to complete.

What are your plans for acquisitions? What type of bank interests you?

We're approved by the FDIC for acquisitions of troubled banks. There are not many banks in Florida that are on that list. In 2011, we purchased our Winter Haven office, which used to belong to a bank that was shut down.

We've been looking to buy another bank or branches. We just haven't found anything that really suits what we are looking for.

Regulators, as a rule of thumb, will allow you to go to 50% of your current size in a bank acquisition. The other thing has to do with market area. Being here in central Florida between Tampa and Orlando, we're not going to acquire a bank in Miami, Pensacola or the Panhandle. It has to have fairly close proximity to existing offices.

We would want a bank that does mostly commercial lending. With consumer lending, it is very difficult to get decent volume unless you are a really large commercial or regional bank. For example, there are car dealerships that can offer noninterest auto loans or 1% auto loans. We just can't compete with that.

What has been the hardest challenge to finalizing a deal?

We did not like the loans at one bank. There were a number of loans that we would never have approved, such as restaurant loans. That's a very difficult industry, so we've steered away from restaurant-type loans.

Another problem was cultural differences. We're seven years old and we've developed relationships with our customers, not just by doing loans and taking deposits, but by also being involved in the community. That was a problem for one of the banks we [looked at]. It was a completely different culture.

We also looked at a bank that was in very good shape and had a good loan portfolio, but they were looking for an all-cash deal. We're well capitalized right now, and the deal would have put our Tier 1 capital below 10%. Maintaining high levels of capital is a key issue with regulators.

The bank was formed before the financial crisis. How have you been able to survive when other young banks failed?

We decided that any decent-sized loans would require full board approval. The chairman of our loan committee is a retired commercial banker with over 40 years of experience in Polk County. Knowing our borrower, the community and the local economy has helped us tremendously unlike others that came in here, purchased a bank and made loan decisions from out of state.

How are you booking loans without compromising too much on terms?

This year has been difficult in keeping up with our projections for loan growth. That's why I decided to open a loan production office out of our market. The gentleman we hired has brought in approximately $10 million in new loan requests. That's how we've kept up with the volume while many counties here in Florida are down due to the economy.

What's your greatest concern for the banking industry?

The one thing that I have looked at for the last few months has been the interest spread, which has been coming down. On the deposit side, rates have come down as low as they can but we see a lot of loans where customers are renewing it at lower rates.

The second thing is loan volume. In the past, if we couldn't get enough loans, we would buy securities. The yields on investments are down significantly. If you have rates going up and you then have to mark to market your securities portfolio you could look at losing millions of dollars not in actual cash losses but in adjusting your book value that is required from accounting standards.

Many banks have turned to other revenue sources, such as fee-driven services, to help the bottom line. What other revenue sources have you examined?

We're looking into repricing some products. We have a big push on imaging machines to commercial customers, especially if those customers are somewhat out of our market area.

We started a courier service where we'll send the bank to customers if they can't come to the bank. Right now that's free, but in the future we may look to charge for that service.

There are other types of businesses we aren't into yet but we could consider, such as trust services or selling annuities.

What are some of your predictions for community banks over the next few years?

One concern is the regulatory environment and consumer compliance. Up until a year ago, we split our compliance duties with two vice presidents. Now we've brought in a full-time compliance officer.

In the last two months we've had seven audits. It's time consuming and it takes people away from customers while they are sitting down with these auditors. That's a big concern on the horizon for community banks.

I see more and more mergers of community banks as [institutions try and get a handle on] the situation of regulatory requirements. When you bring on too many people to handle these requirements then there goes your profitability.

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