It's been about a year since Bank of Florida was shut down by bank regulators and EverBank agreed to purchase the failed bank's assets. So why drag it out of its grave now?
Perusing past Securities and Exchange Commission filings for Bank of Florida, I was struck by how perfect it is as an example of how to blow up a bank.
The period between 2002 and 2006 saw some of the liveliest years of the housing bubble, and Florida's housing market in particular was hotter than Satan's sauna. In the midst of this, Bank of Florida was posting screaming growth, with total loans growing 640%, or roughly 65% per year, to an impressive $784 million.
How was Bank of Florida achieving this impressive growth? As far as I could tell, it wasn't particularly innovative and vastly different from competitors -- in other words, there wasn't a rock-solid competitive advantage. To a large extent, it just seemed like another bank in the region. This likely meant that a lot of that growth came from simply taking on as much business as possible, whether or not it was good business to take on.
Watch out for that growth!
Bank of Florida could be a poster child for the lesson that not all growth is equal -- particularly when we look across industries.
Intuitive Surgical (Nasdaq: ISRG) and Green Mountain Coffee Roasters (Nasdaq: GMCR) are good examples of companies where investors can safely cheer growth. The growth for both is driven by innovative products -- robotic surgical systems in Intuitive's case and the Keurig coffee machine in Green Mountain's case -- and the transactions are pretty simple in that the customer buys the product, pays for it, and the deal is done.
That's far from the case when it comes to banking and other financial industries like insurance. The nature of these industries means that business done today can have serious effects on the financials reported many years in the future; think about banks making long-term loans or insurance companies taking on risks that may not materialize for years.
In a recent New York Times article, Joe Nocera highlighted the reminder from M&T Bank (NYSE: MTB) CEO Robert Wilmers that good banking is about "the prudent extension of credit that furthers commerce." Rare indeed are the instances where prudence can be effectively married with blazing-fast growth.
Warren Buffett -- whose Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) -- contains multiple massive insurers -- has often warned about the need for such prudence when it comes to insurance. In his most recent letter to shareholders, Buffett bemoans the trouble that insurers get themselves into when reaching for growth at any cost:
The urgings of Wall Street, pressures from the agency force and brokers, or simply a refusal by a testosterone-driven CEO to accept shrinking volumes has led too many insurers to write business at inadequate prices. "The other guy is doing it so we must as well" spells trouble in any business, but none more so than insurance.
Bank of Florida may be a fading memory at this point, but it needn't have died in vain. Next time you're drooling over a company's breakneck growth, make sure that it's not setting itself up for heartbreak down the road.
