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Marine Bank set to defend record before FDIC

STORY BY LISA ZAHNER, (Week of July 7, 2011)
Photo: Marine Bank & Trust CEO William Penney.

A deeper look into what's going on with Marine Bank & Trust, Vero Beach's only locally owned bank, reveals a nuanced picture not as worrisome as portrayed by federal banking officials and blared in headlines last week.

The Federal Deposit Insurance Corporation charged the bank with "unsafe or unsound banking practices" and plans to hold a hearing soon to air the allegations.

But the FDIC reports were based on year-old numbers and, according to Marine Bank & Trust President and CEO Bill Penney, painted the bank with a "broad brush."

Penney, along with the bank's founder George R. Slater and some important customers, are steadfast in saying the bank is on the right track.

In light of the FDIC charges, is the business plan of a hometown bank being unfairly judged by big-bank standards, or are the concerns of the feds justified?

That remains to be seen, and Marine Bank & Trust will get a hearing – either in public or in private – before a special federal administrative law court this summer.

Objectively, in some key areas the bank's balance sheet has improved since June 30, 2010, and the bank not only recovered from losses last year but recently turned a small profit.

The numbers remain a mixed bag, according to the FDIC.

One FDIC concern is that Marine Bank's debtors are of a similar demographic, subject to the same market fluctuations and risks, but that invariably goes with the territory of being a local bank in a small, homogeneous community, Penney said.

"We serve Indian River County, so we have a concentration of our loans and deposits in Indian River County," said Penney. "That's what we do as a community bank."

The FDIC also criticized the bank for having what it called "lax loan administration" and "insufficient collection practices."

Penney said the bank has worked to clear some of those defaulted business loans and mortgages from its books. "We'd rather work with somebody to restructure their payments than to have them default on a loan or (force us) to foreclose on a property, but we do have to do that when the person won't work with us," he said.

Penney said the bank has had only 20 foreclosures in the last two years due to its strategy of trying to help customers with loans in arrears.

Based on data provided by the bank, loans dropped from $122 million a year ago to an estimated $107 million today and non-performing loans have been cut from $11.1 million in September to an estimated $8.2 million today.

"The reduction in non-performing assets is an important measure to assess the bank's progress," Penney said.

Total deposits have gone down about $4 million from $136 million to $132 million and total assets have also slipped, from $153 million in June 2010 to an estimated $145 million at the close of June this year.

The bank is midway through a capital campaign in which it's fishing for new investors to bolster its coffers by $4 million to make the FDIC more comfortable.

"The pitch is, first, do you believe in the long-term future of Vero Beach and Indian River County? Most people do because they live here and make a living here," Penney said. "And secondly, do you feel that there's a place for a community bank in Indian River County? And do you feel that the economy will come back?"

Even if Penney is successful in raising the $4 million, the bank still must pay back $3 million in federal recovery money, known as the Troubled Asset Relief Program (TARP) funds. Records show the bank has only paid back some interest and dividends totaling roughly $235,000.

Bank founder and Chairman Emeritus George R. Slater said he and the rest of the board members were solidly behind accepting the TARP funds. "At the time we had adequate capital, but it was uncertain times," he said. "People are holding onto their cash and not investing."

Though uncertain of the repayment details, Slater said the interest increases significantly after five years as an incentive to pay back the money. The ballooning interest payments are three years away. Legislation in the works could also require more reporting as banks take more time to pay the money back.

The entire banking and mortgage industry is desperately trying to emerge from the recent one-two punch of the sub-prime mortgage meltdown of October 2008 and the worst recession the United States has seen in generations.

"About 80 percent of the banks are under some kind of consent order or action," Penney said.

Marine Bank & Trust's difficulties reflect the recent history of Vero Beach's real estate-based economy.

Penney said the obvious repercussions of the bursting real estate "bubble" and the banking crisis that followed were felt in the building trades and reflected in lower property values, but that the pain infiltrated every segment of the business community

"We didn't do speculative loans, we just loaned money to good, local businesspeople," Penney said. "It’s obvious that the builders and contractors are affected, but what's not as obvious is that everybody is affected from the doctors and the lawyers to the nail technicians."

Though the bank did not engage in the sub-prime lending that caused nationwide panic and mayhem, customers still fell behind in payments, increasing the non-performing loans, Penney said.

That didn't stop the bank from continuing to pump money into Vero Beach, Penney said; he and his board have faith that Vero Beach will come back better than ever.

Penney said most up-or-down loan decisions are handled at the staff level with Chief Lending Officer Brian Fowler and himself, but said very large investments go before the board.

Developer Keith Kite went to the bank which was part of a consortium of lenders that provided financing for a large project – the 83-room SpringHill Suites by Marriott hotel which opened in August 2009 just outside Grand Harbor on Indian River Boulevard.

Vero Millwork owner Jeff Thompson said he's grateful the bank has been there for him and other local businesses. He took out loans with Indian River National Bank for a new 30,000-square-foot facility and during the takeover by RBC, his loans were sold to a private equity group out of town.

"Our commercial loans went on the chopping block; they said they had to get rid of them and I lost my hometown contact with a banker," Thompson said. "Bill Penney worked with me for over a year to get the private equity group to sell the loans back to me through Marine Bank."

That was three years ago and Thompson said he's recommended the bank to many people. The recent FDIC news doesn't bother him.

"All it means is the feds are overstepping their boundaries. I don't think they are familiar with or care about at the local level how bankers work with local people," he said. "Marine Bank has got a great bunch of people running it – smart people, conscientious people who know how to run a bank."

The bank’s governing board represents an estimated 350 people who invested money in it. Almost every investor, Penney said, has connections to Vero Beach.

The board includes luxury home builder David Croom, attorney G. Russell Peterson, CPA Charles Gould, Kevin Given of Quail Valley River and Golf clubs, arthroscopic surgeon and former L.A. Dodgers medical consultant Dr. Donald Ames, Wilton R. "Rusty" Banack representing the citrus industry and Bent Pine developer Kirk Kohler. Doug Hazel, long-time banker, real estate investor and sand mine owner, currently serves as board chairman.

Board members, Penney said, are permitted to come to Marine Bank for a loan, but there are very strict rules about making loans to them. "I consider myself a pretty tight underwriter anyway, but I'm even tougher on members of the board," he said.

The FDIC doesn’t see it that way. The agency marked the bank down for its high concentration of business and real estate loans to those business owners and developers.

“The Bank has an excessive concentration of commercial real estate (“CRE”), particularly speculative construction and development loans, which has elevated risk to an unacceptable level,"the agency said.

Slater, from his summer home in Milwaukee, offered his insights into the bank's current dealings with federal regulators to maintain control of how it conducts its business.

"I have perfect confidence in our management," Slater said. "I think we have sufficient capital that the regulators would be hesitant to do anything but support us and to help us in getting more capital."

Slater, 87, has spent much of his life in banking including the Marine Corp. (now J.P.Morgan) where the Marine Bank name came from, and he said the recent recession has been "the worst since the Great Depression." He should know as he grew up during that era in the hard-hit Midwest.

From a vacant lot on Beachland Boulevard, Slater built Marine Bank & Trust literally from the ground up. He helped design the building and he and his wife Mary hand-picked every painting that hangs on the walls and the furniture in the offices.

Marine Bank could easily sell a controlling interest to a faceless, out-of-state entity, but that's not an option for the bank he founded, Slater said; keeping it local is critical.

Slater said that despite the current challenges, the bank has the right stuff to not only survive, but to thrive. "We love our customers and our customers love us and we intend to continue to serve Vero Beach," he said. "We have employees who are great and very loyal and a president who is doing an excellent job of articulating who we are and what we do."

The FDIC made public the charges against the bank June 24. The bank's name appeared way down the page in a press release of dozens of banks under various levels of FDIC scrutiny.

The official documents state that the bank had 20 days from May 20 to file a response and that a hearing, open to the public, would take place within 60 days.

FDIC spokesman Greg Hernandez verified last week the bank filed a timely response, but added it included a request for a private hearing instead of a public one.

Hernandez would not comment on the content of the document issued about Marine Bank by the FDIC or the assertion by Penney that some numbers contained in it were wrong. "We let the notices speak for themselves," he said.

A five-person panel at the FDIC was scheduled to meet Wednesday. The bank issue was not on the FDIC's published agenda, but Hernandez said that after the public part of the meeting is adjourned the panel takes up various matters in private. He said he did not know whether consideration of Marine Bank's private hearing request would happen Wednesday or at the next month’s meeting.

Pending the request, however, the hearing date – which had already been set – could not be released.

If the FDIC honors the bank's request for a private hearing, its response to the charges would remain sealed for now. Should a public hearing be the pleasure of the FDIC, the bank's response would become a public document.

When asked, Penney would not release a copy of the response to Vero Beach 32963.

Penney also defended the request for a private hearing. “We did ask for a private hearing and I think anybody who was going through discussions of this nature would want to do it in private," he said.

Best case for Marine Bank, the FDIC would look at its updated balance sheet in a positive light and back off, from a regulatory perspective. Worst case, Marine Bank could be told to cease the specific lending practices that the FDIC considers risky.

"The key thing about our capital rating is that we are adequately capitalized and we're approaching well capitalized," Penney said. "Well capitalized is an A and adequately capitalized is like a C. You're not thrilled, but you're not going to fail out, either."

The FDIC asked Marine Bank to sign a consent order in which it agreed to increase reserve capital, reduce problem or non-performing assets and increase earnings.

"We were all fine with that, we knew why we have to improve the numbers," Penney said.

At the time, the FDIC asked the bank to do what Penney described as "a couple of key items not in the best interest of the bank and the shareholders." He wouldn't elaborate on them, but the disagreement over that area of bank management led to the charges.

While the administrative wheels turn at the FDIC and the attorneys prepare to argue the cases, Penney said customers have called and stopped by to ask questions and to receive reassurance.

Though no formal written or electronic communication with bank depositors is planned, Penney said any bank employee is empowered with all the facts and details necessary to put depositors at ease now that the FDIC charges are public.

"I gave the employees the complete information about the situation and let them go as far as they feel comfortable," Penney said. "Then if someone wants to, they can come and speak with me or one of the senior officers of the bank."