Florida Regulator Grady Aims to Help State's Banks Rebound

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Tom Grady would have never thought six months ago that he would have stewardship over roughly 160 state-chartered banks in one of the highest failure-rate states in the country.

Grady, a former securities lawyer and state politician, is entering his first full year as the Commissioner of the Florida Office of Financial Regulation, or OFR, after Gov. Rick Scott tapped him for the role. He joined the office in August.

"This is not something I thought of doing on my own and it's a dramatic change from the private practice," Grady said. "When the governor asks you to do something, you do it."

Grady may be new face for regulation, but he has nearly three decades of legal experience under his belt. In a wide-ranging interview, the former Republican state legislator from Naples cast himself as a proponent of free markets, which may be exactly what Florida's banks need given the heated regulatory climate in Washington.

"Bankers overall are not crazy about the regulators but the OFR specifically has been working very closely with its banks to make sure their examiners are reasonable and proactive," said Eddy Arriola, the chairman of Apollo Bank, a $212 million-asset state-chartered bank in Miami.

Grady knows that the regulatory environment following the financial crisis has been rough on bankers and their institutions.

"In the last several years, there have been times when a majority of our banks have been under increased scrutiny under our office," Grady said. Still, he believes that his office can cut overlapping regulation to help smaller banks, particularly once concerns about troubled institutions abate.

The Florida Office of Financial Regulation is continuing "to reduce, to the extent we can, a redundancy in state and federal regulation," Grady said. "We want to lessen the regulatory burden and help the state move forward."

Last year, the legislators in Florida passed a law directing the OFR to examine overlapping policies within the office and to identify ways to work more efficiently with federal regulators and others. This includes sharing more bank exams with the Federal Deposit Insurance Corp. rather than having both regulators performing the same exams.

"We may rely more on federal exams for some banks and they may rely more on us," Grady said. "We frequently cooperate [with the FDIC] but we typically do not have joint reports."

Grady also looking at reducing annual fees for its member banks this year to provide some relief. While the fee is minimal, it will help more than half of the 161 state-chartered banks that remained unprofitable at Sept. 30, based on FDIC data.

"Our year is neither made nor hurt because of OFR fees," Arriola said. "But every little bit helps, especially for some of banks on the edge."

Last year was disappointing for many hopeful Florida bankers who continued to wrestle with quarterly losses and loan portfolios that still show weakness. Because of this, few are betting on huge recoveries in 2012.

"Although last year was not terrible, we were terribly disappointed," Arriola said. "We're all expecting … 2012 to look like 2011. … Many bankers are saying, 'we're just going to drag our feet and pray for the best'."

Bankers in the Sunshine State struggled to reduce nonaccruing assets at the end of last year. Such assets totaled $3.3 billion at Sept. 30, falling just 2% from a quarter earlier, according to the most-recent data from Saltmarsh, Cleaveland and Gund. At one point, such assets were declining by 10% or more during some quarters.

The amount of other real estate owned held by Florida banks, which primarily consists of foreclosed properties, barely changed during the third quarter.

"We're starting to see … more people interested in" foreclosed property, "but it has not moved quickly," said Bill Massey, an accountant and bank consultant at Saltmarsh, Cleaveland and Gund. "It's just been a slug of a process."

Still, observers say there are some improvements in Florida, where last year's 13 bank failures compared favorably to the 29 that were closed a year earlier. Grady said he expects the total to decline further this year.

While Grady said that a stabilizing economy is the biggest reason for fewer failures, he gave some credit to the OFR for helping bankers "find ways to survive, including, at times, working together with the FDIC."

Alex Sanchez, the president and chief executive of the Florida Bankers Association said he is hearing more bankers say their most recent state exams had improved or that their status was upgraded. "I'm hearing more and more bankers say they are lending and we need the examiners to continue to work with our banks," he said.

Grady said he realizes that Florida's banks continue to face steep challenges raising capital and scrubbing their tarnished loan portfolios, and that is office is looking to address those issues.

"Capital raising can be difficult for banks because of the uncertainty primarily in the federal area in terms of what happens with [the Dodd Frank Act], the Volker Rule and the [Consumer Financial Protection Bureau], though this doesn't necessarily apply to community banks," he said.

But Grady said that weak capital raising conditions, coupled with the heavily debated uniform capital ratio standards, leaves "an opportunity to negotiate" with federal examiners. "Personally, I don't think [capital ratios] should be uniform, as it is currently," he said.

"I understand the desire for a uniform standard because it certainly eases the regulators' job for having a formula to measure the bank's assets," Grady added. "But it does have unintended consequences of increasing systemic risk."

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