The Great Recession took a big toll on Southport Bank in Kenosha, but the business has returned to profitability with the help of its shareholders and an angel investor.
In 2010, a group of existing Southport shareholders injected $4 million of equity into the bank. Angel investor Guy Cecchini, the uncle of founding shareholder Jim Cicchini, chipped in $10 million.
Southport is not the only community bank that struggled to remain afloat during the financial crisis – Johnson Bank in Racine and ISB Community Bank in Ixonia also went the private recapitalization route.
The Johnson family invested $235 million of private funds into Johnson Bank in February, while the Lubar family announced plans to invest $20 million in ISB parent Ixonia Bancshares in April.
The Lubar family reviewed about 12 area banks to find the right investment, said David Bauer, chief financial officer of Lubar & Co., who served as financial advisor to the family for the transaction.
Sheldon Lubar, founder and chairman of Lubar & Co., has a lifetime of banking experience and wanted to invest in the broken community banking industry, Bauer said. A private capital investment is one of the best options for smaller, struggling banks.
“The regulators liked the Lubar family capital coming to the table,” he said. “That’s one of the biggest challenges that I see community banking having today is that institutional capital is frowned upon by the regulators.”
The Lubars see the recapitalization as a good long-term investment opportunity for the family. Ixonia will now be financially sound, profitable and able to grow.
“Fundamentally, we believe community banks will thrive in the future because of the local relationships and decision making,” Bauer said.
But investing in community banks may not be the answer for everyone.
Banks should be evaluated on a case-by-case basis, said Bryce Rowe, a senior analyst covering community banks at Milwaukee-based Robert W. Baird & Co. Inc.
Low interest rates have made it extremely difficult for banks to earn a profit, and therefore it’s difficult to justify the investment right now, he said.
“There’s still quite a bit of work to do to clean this thing up, because it was in pretty dire straits,” Rowe said. “Our general thesis with respect to the community bank space is probably not (a good investment). We would prefer not to have exposure to the community bank space, generally speaking.”
However, some community banks can be good investments, if they have handled their balance sheet well in the last several years and have good, locally originated core deposits, said Colin McWey, equity research analyst at Heartland Advisors in Milwaukee.
“You have to be selective in picking your investments among community or regional banks, but in a fragmented industry, there are guys that are in a much better position going forward,” McWey said.
In the long-term, the community banks that aren’t able to turn themselves around will need to merge and consolidate with the strongest players in the market, he said.
It’s difficult for community banks to get access to public capital, so Southport took the right approach in recapitalizing privately, McWey said.
“To find strategic capital, long-term capital, private equity-type money, I think that’s a smart avenue that some of these banks have had to look at it if they want to recapitalize themselves,” he said. “What it does, I think, is it probably enables these folks to align themselves with investors that have a longer term perspective.”
Southport Bank was founded in 1997. Like many startup banks in the ’90s, it grew quickly with the help of real estate lending, said Tim Schadeberg, president and chief executive officer.
But a lack of policy or procedure in training saddled the bank with some bad loans, he said.
“They outstripped their ability to grow core deposits,” Schadeberg said. “They were backing loans that, from a credit standpoint, probably were not the best.”
Southport lent heavily in real estate and took a big hit in late 2007 and early 2008 when construction slowed down, said Arthur Thompson, executive vice president and chief operating officer.
Thompson has worked to diversify the balance sheet and put that money into other assets. Southport never dipped to critically undercapitalized, but has maintained adequately capitalized status with the FDIC, he said.
“We’re out of imminent peril because of the last capital raise,” Thompson said.
Since Southport is a Subchapter S institution, it didn’t have many options for public funding under the Troubled Asset Relief Program (TARP), Schadeberg said. So it raised $14 million privately, and plans to complete another $5 to $10 million round of fundraising soon.
Schadeberg took over as president and CEO in May 2011 to turn the bank around. He had experience in dealing with problem credit, as president of InvestorsBank in Pewaukee and Milwaukee market president at Columbus, Ind.-based Irwin Union Bank and Trust Company, which closed in 2009.
When he came on board, Schadeberg first assessed the current staff. He brought in a new group of senior managers and reviewed the rest of the employees. Then he focused on the fundamentals of banking–policies and procedures.
Finally, he evaluated how to handle the problem loan portfolio.
“How do we create a positive outcome, if there is such a thing?” Schadeberg said. “Our biggest problem was credit quality and lack of capital.”
He created a plan: cleanse the portfolio, strengthen the balance sheet and start putting the bank in a position for growth.
“We strengthened our loan policy, we strengthened our credit underwriting and we started holding people accountable,” Schadeberg said.
Southport added a quantitative element to how it risk rates credits, rather than just qualitative, he said.
The bank’s balance sheet was in trouble, with total classified assets, those assets that are substandard or may not be repaid, of about $82 million in 2009.
Schadeberg worked to reduce the number of bad loans by helping those payers who could continue contributing to the debt and writing off the others.
Southport ended the first quarter of 2012 with $41 million in total classified assets. Now, the TCA is closer to $30 million, he said.
The bank got rid of more than 30 percent of its other real estate owned properties, or those properties it foreclosed on and now owns, which amounted to about $3 million.
The bank has closed two of its five branches in the last year – one in Racine and one in a Kenosha grocery store. Racine was the newest branch, and it never took off, Schadeberg said.
There are now three branches: the headquarters at 7027 Green Bay Road in Kenosha, one at 1350 22nd Ave. in Kenosha, and another at 23604 75th St. in Salem.
Southport has 63 employees among the remaining locations. Schadeberg plans to expand again, but not for at least two years. He’s focused on getting new business.
“For every dollar of problem asset on our books, we’d like to replace it with a dollar of performing asset,” he said.
The bank lost almost $20 million in 2009, $16 million in 2010 and $1.3 million in 2011.
Business started to pick up in the fourth quarter of 2011. So far, 2012 has been profitable for Southport Bank, which has total assets of $273 million.
A dedicated staff, loyal customer base and an engaged board that was willing to inject the needed capital helped turn Southport Bank around, Schadeberg said.
Community banks have investors because they focus on small businesses and provide accountability with quick, local decision making, he said.
“Big banks are geared primarily to serve large organizations,” Schadeberg said. “What you lose with the community bank maybe on the higher innovation, you get with the personal feedback.”
