Last month an unlikely hero emerged in the ongoing process of restoring relations between the U.S. and Cuba: a small, 21-branch community bank in Florida called Stonegate Bank (NASDAQ:SGBK).
It turns out that the process of bringing back a Cuban embassy to the U.S. requires a bit of business practicality, alongside the challenges of diplomatic negotiations. First and foremost, the Cubans need a U.S.-based bank to pay bills and process visas and passports. Finding that bank turned out to be much harder than the State Department bargained for.
Paying for visas in cash
After President Obama announced the restoration of relations with Cuba last December, the State Department for weeks tried in vain to expedite the bank selection process and find a new bank for the Cuban government.
Previously, M&T Bank (NYSE:MTB), a $98-billion institution based in Buffalo, N.Y., serviced the Cuban government's banking needs in the United States. However, M&T made the strategic decision to stop doing business with all foreign governments in 2013, after the bank came under scrutiny from regulators for its compliance with the Bank Secrecy and Anti-Money Laundering Act.
For the past year, that meant that Cubans seeking visas, passports, or other consular services were forced to pay in cash. Without a bank account, the Cuban government simply didn't have access to the financial system.
The State Department needed to find a replacement for M&T, a bank that was willing to open the accounts, was comfortable with the risks associated with serving the communist nation, and, if possible, had at least some prior experience working with Cuban interests.
The prospect was too risky for every bank they approached.
The banks were scared away by the risks from tricky rules from the Commerce Department and Treasury layered on top of a potential political controversy. It's been over a half century since the U.S. and Cuba got along politically, and many Cuban-Americans have strong and disagreeing opinions about U.S.-Cuba relations.
M&T Bank's struggle with the Bank Secrecy and Anti-Money Laundering Act almost certainly weighed on the minds of bank executives as well.
Enter Stonegate Bank
Then, after months of frustration, Miami businessman Ariel Pereda suggested the State Department consider Stonegate. Pereda owns and operates a distribution company that represents American food brands legally exported to Cuba.
His business banked with Stonegate, meaning the community bank had indirect exposure doing business with Cuba.
It also didn't hurt that Stonegate is one of the soundest financial institutions in South Florida. Stonegate was formed in 2005, giving it the benefit of skipping most of the subprime craze and coming through the financial crisis relatively unscathed.
Today, for example, the bank's ratio of non-performing assets to total assets is just 0.22%, nearly six times lower than its peer average. Non-performing assets are loans that are severely past due, plus real estate in foreclosure.
The bank's total assets have grown 213% from year end 2009 to year end 2014. Over the same period, net income has grown from a mere $524,000 to $12.8 million annually. The bank is also very well capitalized, with a 10.97% Tier 1 leverage ratio.
A win-win situation
The benefit for the U.S. and Cuba is obvious: It would be impossible for the Cuban government to open an embassy without access to the U.S. financial system. It's important to remember that Stonegate isn't serving as "Castro's bank," but rather as the bank of the Cuban people as a whole. These accounts will function to accept payment for visas and passports, encourage trade, and support the needs of the people.
For Stonegate, providing services to the Cuban government is a way to promote the bank, land a large new account, and beat other competitors to the Cuban market. "Stepping up to the plate and doing something first is always better than being last in line," said bank President and CEO Dave Seleski. "We're a bank; we're no different from other companies."
The bigger picture hope is, of course, to bring greater prosperity to Cuba, improve U.S. relations with Latin America more broadly, and hopefully move toward a more amicable and less confrontational relationship between neighbors. In agreeing to work with the Cuban government, Stonegate Bank is positioning itself as a relatively minor but important player in achieving these noble aims.