When John Kanas arrived in South Florida last May as the savior of the state's largest homegrown bank, the $12.8 billion-asset BankUnited in Coral Gables, he did so with a wad of private-equity cash in his back pocket, a cushy loss-sharing agreement with regulators and a healthy dose of realism that "even our worst fears about the Florida market would be overly optimistic."

Nine months later, with real estate values still plummeting and unemployment in Florida approaching 12 percent, the former head of North Fork Bancorp has seen little to change his outlook for the state's banking industry. Eleven more banks have failed in Florida since BankUnited went down, for a total of 16 since mid-2008, and Kanas predicts that as many as 100 more banks and thrifts will fail there over the next couple of years. "The market is just devastated," Kanas says. "The patient is on life support."

The old banking adage says first-in, first-out: Markets that get into trouble first in a cycle often lead the rest of the country out. But Florida, among the states hit earliest and hardest by the bursting of the housing bubble and the ensuing financial chaos, could well prove to be the exception to that rule.

At the end of the third quarter, noncurrent loans for all Florida-based banks and thrifts averaged 6.71 percent - more than double their levels a year earlier, according to SNL Financial. The $2.5 billion-asset Capital City Bank Group in Tallahassee is widely regarded as one of the strongest, most conservatively run bank companies in the state, yet in the third quarter its return on equity was minus 2.15 percent and nonperformers equaled 7.25 percent of assets, according to Federal Deposit Insurance Corp. data.

"The best-run banks in the state are sitting with problem assets in the high single-digit rates and no profits, and we don't have a sense the problems have peaked yet," says Joe Fenech, an analyst at Sandler O'Neill & Partners LP. "Things are very tough."

The real estate bust is radically altering the Sunshine State's banking landscape. Large out-of-state banks are still the dominant players (though some of the names have changed), but a wave of failures is opening the door to new competitors like BB&T Corp., New York Community Bancorp, Iberiabank Corp. in Louisiana and Hancock Holding Co. in Mississippi, all eager to build market share on the cheap in what is still the country's fourth-largest deposit market.

BB&T, for example, more than quadrupled its market share in the state with its FDIC-assisted deal for the $25 billion-asset Colonial Bank of Montgomery, Ala., adding 201 branches and $10.4 billion of deposits. New York Community gained 24 branches in Florida after acquiring the failed AmTrust Bank of Cleveland and, with an eye toward beefing up deposits, could be scouting for more deals there. And Iberiabank, which already had a small presence in Jacksonville, moved into two new Florida markets when it bought two failed banks - Orion Bank in Naples and Century Bank of Sarasota - on the same day in November, giving it $3.1 billion of assets, $2.5 billion of deposits and 34 offices in the Sunshine State.

In a conference call with analysts and investors a few days after closing the deals, Iberiabank president and CEO Daryl Byrd explained his thinking. "When everyone wanted to be in Florida and pay five times book for overvalued assets, we expanded in Louisiana and Arkansas," he said. "We believe this is the right time, price and risk structure to enter these Florida markets."

Even Kanas, who says a full recovery could be years away, is aggressively recruiting talent from rival banks and has made no secret of his intentions to acquire more failed banks in Florida. "We believe there's a once-in-a-lifetime opportunity for us to augment this franchise and build a statewide institution," he says.

It helps, of course, that the FDIC is covering the lions' share of failed banks' loan losses. Even at fire-sale prices, buyers wouldn't be so eager to bulk up in Florida if it meant getting stuck with piles of bad real estate loans.

But, for all its problems, bankers are drawn to the state for the same reasons retirees are: abundant sunshine, beaches and golf courses, no state income tax and, these days, very affordable real estate. Though population growth has slowed considerably from when 1,000 people were moving there a day, Florida is still on pace to surpass New York as the country's third most-populous state some time this year.

"Florida has more than 18 million people, and the last time I checked it was still warm in January," said BB&T CEO Kelly King, explaining the decision to acquire Colonial. "For baby boomers looking for someplace to retire, the values have been so deeply discounted, it's inconceivable to me that Florida will not come back strongly."

The availability of cheap money in the early- and mid-2000s fueled an explosion in building activity, real estate prices ballooned, and speculators descended. "Suddenly you had the New York X-ray technician who wanted to buy five condos like his buddy did and flip them for a profit," says Alex Sanchez, CEO of the Florida Bankers Association. "When the music stopped, he got caught without a chair."

Locals caught the fever, too. Bill Valenti, CEO of the $340 million-asset Florida Gulf Bancorp in Fort Myers, recalls an otherwise sane customer visiting his office in 2006 seeking a $1 million credit line to buy lots in a high-end subdivision. "He was going to pay $72,000 for each lot and flip them to out-of-state investors," says Valenti, who passed on the credit line. "Today, those lots are selling for less than $10,000."

Fallout from Florida's real estate collapse has caused plenty of pain outside the state. National City Corp. of Cleveland was forced to sell itself to PNC Financial Services Group of Pittsburgh in late 2008, two years after acquiring two Florida real estate lenders at the market's peak and taking huge write-downs on their portfolios. Colonial, which placed a big bet on Florida's housing market, was seized by the FDIC after recording a $600 million loss in the second quarter.

Other struggling regional players, including Synovus Financial Corp. of Columbus, Ga., Fifth Third Bancorp in Cincinnati and South Financial Corp. in Greenville, S.C., can trace much of their asset-quality problems to real estate loans they inherited through acquisitions of Florida banks. And the single biggest reason Corus Bancshares of Chicago failed in November was because 93 percent of its $1.03 billion in loans to south Florida condominium developers were delinquent.

"The irony is, three or four years ago, all investors wanted out of any large bank was a presence in Florida," says Sandler analyst Kevin Fitzsimmons. "Now, it's an absolutely toxic market for banks, and every one of those institutions has been hurt. They enjoyed the boom, and now they're paying the price for the bust."

At times, it seemed the exuberance knew no bounds. Integrity Bank in Juno Beach and Hillcrest Bank in Naples, which both failed, were run by out-of-staters who lacked local-market knowledge - a common affliction, locals say.

A material loss review by the FDIC's inspector general found that $276 million-asset Freedom Bank in Bradenton collapsed because management, led by a CEO with a past failure on his resume, aggressively pursued "high-risk CRE loans with inadequate loan underwriting and a lack of ... risk-management controls."

A prompt corrective action order from the Federal Reserve, issued just days before its November failure, found that the $2.7 billion-asset Orion made $60 million in "unsafe and unsound" loans to "straw borrowers," who used the money to buy bad assets from the bank, then followed that up with a $15 million loan used to purchase the company's stock-all after the bank had blown past its legal lending limit. The Fed demanded that the board oust the CEO, but the point was moot when the bank was seized four days later.

The mood in the banking community now is a mix of tension and gloom, tempered by hopes that the worst might have passed. At industry conferences this past fall, William Smith, Capital City's CEO, heard bankers from other states "preaching the same story we were preaching in January. Our conversation is about nine months ahead of theirs."

Smith says he sees clear signs of market improvement - firming property prices, a pick-up in new-home sales, "and brisk and robust activity" in some small-business sectors. "We still have a ways to go. This was deep and severe," he says. "But we're seeing signs that we've found the bottom of the pig's belly, and things are beginning to turn."

The pace of the state's rebound will have a big impact on the industry as a whole. As of June 30, seven out-of-state players controlled more than half of the state's branches and 57.5 percent of its $401 billion of its deposits. "It's such a crucial battleground state, we won't see true normality [nationally] until we see a recovery in Florida," says Ken Thomas, an independent bank consultant in Miami.

JPMorgan Chase & Co., which had just 10 Florida offices pre-crisis, has been changing the signage on more than 200 acquired Washington Mutual branches as quickly as possible, to escape the taint of the biggest bank failure in U.S. history. Wells Fargo & Co., which jumped from virtually zero to a 16 percent market share with its deal for Wachovia Corp., is moving slower in converting 700-plus former Wachovia branches, but has already brought its pricing models and rate discipline to the state.

PNC didn't do anything but private banking in Florida until it bought National City, which had 107 branches along the Treasure Coast north of Ft. Lauderdale, but now it is intent on growing there. "We want to double our size here in the next four or five years," says Craig Grant, regional president for PNC's Florida operations.

To be sure, the crisis has been a boon for some local banks. Florida Gulf has high regulatory ratings and capital levels and grew assets by $45 million in the first half of 2009 as customers moved loans and deposits to banks they deemed to be safer. "Honestly, it's been good for us," Valenti says.

The $464 million-asset Stonegate Bankin Ft. Lauderdale, earned $616,000 in the third quarter. It raised $14.2 million of capital in September, and struck an FDIC-assisted deal a few weeks later for the $65.5 million Partners Bank, giving Stonegate a presence in Naples. "It's a no-cost way to enter new markets," says CEO David Seleski.

Perhaps no local bank is better positioned to capitalize on the upheaval than Bank-United. Regulators were so desperate for a savvy buyer that they allowed Kanas to partner with some of the biggest names in private equity and agreed to cover 80 percent of losses on the first $4 billion in loans and 95 percent beyond that.

The $900-million deal implicitly guarantees BankUnited's survival - and Kanas is using it as a marketing tool for luring jittery customers and bankers alike. "Imagine feeling good about your job again, and not dreading your customers' calls of complaints," he intones in a recent full-page ad in American Banker encouraging individual bankers to leave their employers and bring client relationships to BankUnited.

"There are thousands of frustrated bankers in this state who are stuck inside of institutions that have problems that are not allowing them to do business," Kanas says. "They're anxious to join a bank that has excess capital and is on good footing with the regulators."

Well-capitalized out-of-state players, like Hancock, are also poised to grow in Florida. In December, Hancock tripled its assets in the state, to $2.4 billion, with a deal for the failed Peoples First Community Bank of Panama City, and after raising $175 million in October, it has the capital to do more deals there. "We see this as an opportunity to beef up our franchise there and get well-positioned for the future," Carl Chaney, Hancock's president and CEO, says.

Like Kanas, Chaney eventually sees Florida overtaking Georgia as the state with the most bank failures. Thomas, the bank consultant, estimates that more than 40 state banks are on the FDIC's "problem list," with the number expected to grow as regulators step up enforcement efforts. The agency recently opened a 500-person "temporary satellite office" in Jacksonville to deal with the anticipated workload.

The biggest impediment to a recovery is residential real estate. Prices have plummeted in some markets by more than 50 percent since 2006, and despite signs of stabilization, "the entire state is probably looking at another 5 percent drop in value, relative to its peak," says Richard DeKaser, a well-regarded housing economist with Woodley Park Research in Washington.

The drop in values has been accompanied by a crippling recession - the state's unemployment rate in November was 11.5 percent, up from 7.2 percent a year earlier - fostering more defaults. According to the Mortgage Bankers Association, 12.18 percent of the state's 3.5 million mortgages were delinquent at the end of the third quarter, compared to 9.94 percent nationally. Another 12.74 percent were somewhere in the foreclosure process, versus a national rate of 4.47 percent.

Even relatively stable markets, such as industrial Jacksonville or college towns Gainesville and Tallahassee, are struggling. "There's still a pall over the entire state's real estate market ... and a lot of stress among bankers," PNC's Grant says.

Buyers for foreclosed properties exist, Grant adds, mostly in the form of vulture funds offering between 20- to 30-cents-on-the-dollar. Not surprisingly, banks have balked at those prices. "I wonder who is going to buy all of the real estate," he says. "The inventory is so large, it's going to take some time to liquidate it."

The wildcard, as it is across the country, is commercial real estate. Many Florida community banks have CRE exposure above 400 percent of their available risk-based capital, and with businesses trimming their space needs, there's real concern about whether the loans can be repaid.

Anecdotal evidence also suggests some serious slowdowns in the restaurant, retail and entertainment businesses and bankers, along with everyone else, are waiting to see how the crucial winter travel season goes. Staying even with last year's sluggish pace would be a success. CRE problems in the state "are really are just beginning to gain momentum," Kanas says. "There's no real end in sight yet for a bottom in those prices."

Many lenders have been quietly restructuring loans, lowering rates and extending payment terms in what Thomas calls a "delay and pray" strategy.

Most have cut costs and tightened lending policies, exacerbating the recession's effects. Seleski estimates that only about one-quarter of banks are actively seeking new business; the rest are hunkered down. "The mood is pretty dismal, but compared to a year ago, people at least seem to have plans," he says.

Stories abound of regulators ordering new appraisals for property and then forcing writedowns, all while requiring higher reserves and capital levels. Valenti says Florida Gulf was ordered to set aside $1.4 million in the third quarter, boosting its reserve ratio to 1.75 percent of loans. That's low compared to other banks, but above its past-due loan tally of 1.4 percent. "Once we're able to stop putting away so much in reserves, we'll see earnings increase quickly."

Capital is the key to riding out the storm. In total, 31 Florida banks have received $1.1 billion from the government's Troubled Asset Relief Program. The rest of the banks and thrifts have had to raise capital on their own, with varying levels of success.

In September, BankAtlantic Bancorp Inc. in Fort Lauderdale completed a $76 million rights offering, which helped it confront a third-quarter loss of $52.1 million announced weeks later. First United Bank in Boca Raton raised $80.5 million the same month, but is profitable and intends to "take advantage of the opportunities in the market," says Rick Maples, head of the financial institutions group for investment bank Stifel Nicolaus & Co., which helped on the transaction.

Maples says it's generally easier for a Florida bank to raise capital, "because the long-term demographics are perceived to be great." Still, when Bank of Florida Corp. in Naples postponed a $75 million public offering in November, it was an ominous sign. The $1.5 billion-asset company lost $78.1 million in the third quarter, and planned to use the bulk of the proceeds to fill a regulatory capital hole. CEO Michael McMullan blamed "recent negative industry announcements" and third-quarter losses by Florida banks for poisoning the capital-raising environment. "It appears that public investors are back on the sidelines," he says.

Clearly, there's more pain to come. When the state finally does emerge on the other side of the crisis, the competitive landscape will look markedly different from what it was a few years ago. There will be fewer banks, greater concentration and even more outside influence on the state's banking market.

Most expect more discipline, too - at least at the beginning. The Florida market has proven vulnerable to cycles in the past. While this downturn has been a doozy, Florida Gulf's Valenti says people's memories are short.

"Boom and bust is Florida's history," Valenti says. "Five years from now, we'll have forgotten all that's happened, and be right back to being idiots."

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