Senior Contributor
Florida banks ended last year with problem loans reaching a record high of nearly 2.1 percent of the total portfolio amount, due mostly to late payments on condominium and other real estate loans, according to new Federal Deposit Insurance Corp. data compiled by Condo Vultures® LLC .
As a result of the spike, net income for the 317 Florida-based banks fell 53 percent from $1.6 billion in 2006 to $755 million in 2007. By comparison, net income for the country’s banking industry fell 27 percent, from a record $145.2 billion in 2006 to $105.5 billion in 2007.
“Weakness in the housing sector and the credit squeeze in financial markets made it a very challenging time for many institutions, and we can expect these numbers to continue in 2008,” said FDIC Chairman Sheila Bair in a statement accompanying her organization’s newly released Quarterly Banking Profile on Feb. 26.
“Most institutions are so far successfully coping with the challenges they face,” Bair added.
Whether Florida banks can continue to overcome the market challenges given the state's dismal real estate market remains unclear.
According to the FDIC 2007 data, the non-current rate of construction and development loans for Florida banks rose from 0.65 percent at the end of 2006 to 4.51 percent at the end of last year. This category covers all loans to build commercial and residential real estate.
The non-current ratios on single-family mortgages, including condos, at Florida banks rose from 0.91 percent at the end of 2006 to 1.50 percent last Sept. 30 and 2.20 percent at the end of last year. This category covers loans to buy houses and condos, as well as home equity loans.
Single-family residential Real Estate Owned, industry terminology for properties that the banks have taken title to through foreclosure, on the books of Florida banks rose seven-fold from $20 million at the end of 2006 to $144 million at the end of 2007, according to the data.
Problem Multifamily Loans Spike
Additionally, non-current rates on multifamily residential loans at Florida banks rose from 0.43 percent at the end of 2006 to 4.06 percent at the end of 2007. Loans in this category are for purchases of apartment buildings that will be either operated as rentals or converted into condos.
The FDIC data does not indicate total dollar amounts and non-current amounts for condo conversions. Indications are that conversions are a primary cause of Florida’s non-current multifamily residential loans spiking 10-fold in a year
Historically, bankers and regulators have long regarded loans to buy apartment buildings as some of the “safest” real estate loans.
At the end of 2005, when many condo conversion loans were in early stages, the non-current multifamily rate for Florida banks was just 0.23 percent.
Nationally, the non-current multifamily rate remained a relatively low 0.76 percent at the end of 2007.
Industry watchers are focused on Florida’s spiking non-current ratio for total loans and leases.
The ratio of the Florida-based banks’ non-current loans and leases as a percentage of total loans and leases jumped to 2.09 percent on Dec. 31, 2007, from 0.65 percent at the end of 2006. In the first nine months of 2007, the non-current loans and leases ratio was 1.53 percent, according to the FDIC data for the 317 Florida-based institutions.
By comparison for the nation’s 8,533 banks, the non-current ratio for all loans and leases rose from 0.78 percent at the end of 2006 to 1.39 percent at the end of 2007. The FDIC said the 2007 ratio for U.S. banks was the highest since 2002.
Non-current loans are those 90 days or more delinquent and no longer accruing interest. Real Estate Owned properties are not counted among the non-current loans.
For all real estate loans in the portfolio of Florida banks, the non-current ratio rose from 0.66 percent at the end of 2006 to 1.68 percent on Sept. 30, 2007, and 2.35 percent at the end of last year.
Nationally, the non-current ratio for real estate loans rose from 0.80 at the end of 2006 to 1.71 at the end of last year.
Last year’s spike in non-performing real estate loans in Florida – and throughout the nation - occurred largely because regulators required banks to stop adjusting or extending loan contracts to keep borrowers current and/or the interest reserves built into loans had run out. Many of these loans were made to condo builders and homebuilders in heydays the real estate boom in 2004 and in 2005.
For all real estate loan categories at Florida banks, the latest problem loan ratios are the highest since the FDIC began tracking that data by state in 1994, according to the FDIC report.
It is impossible to decipher which regions of Florida are being the hardest affected since the FDIC does not provide non-current loan breakdowns by county. Still, the FDIC report shows the severity of the condo glut, the homebuilding backlog, and the overall subprime mortgage crisis in Florida and around the country.
Bank Profits Drop
The FDIC report also revealed big profit drops in 2007 for Florida-based institutions and national banks.
Many banks are experiencing declines in operating earnings amid a slowdown in lending and a shrinking pool of deposit dollars, which is forcing them to compete and pay higher rates for that funding.
This is prompting several banks to add to their reserves to cover potential loan losses. This is a significant step since money a bank adds to reserves is subtracted from a quarter’s income.
On Feb. 28, Federal Reserve Chairman Ben Bernanke testified before a Senate Committee and for the first time publicly conceded that “there probably will be some bank failures,” resulting from the housing crisis.
Bernanke added that he does not expect a large number of failures, and that his concern is about the category of smaller regional banks that have heavy exposure to falling property markets.
Banking analysts frequently mention South Florida among areas of the country with that potential problem.
But analysts and regulators note that the banking industry and most banks remain “well capitalized” following a record run of earnings from 2003 through 2006.
For some banks, avoiding failure or possible sales to other banks at relatively low prices could depend on whether they can restructure or sell many of their current problem loans -- thus avoiding foreclosures.
However, a Condo Vultures® review of reports that banks submitted to the FDIC show the dollar volume of real estate loans 30 and 60 days delinquent is still rising at some South Florida banks. Statewide numbers on loans in those categories are not readily available.
One certainty is that the ongoing increase in problem loans, amid related economic problems, will lead many banks to continue the tightening of lending standards and the slower pace of lending they began last year.
Of the 79 banks based in the South Florida counties of Miami-Dade, Broward, and Palm Beach, 38 have $300 million or more in assets.
The 38 South Florida-based banks with assets over $300 million met all FDIC capital-to-asset ratios for being “well capitalized” on Dec. 31, 2007.
Some of these banks have begun to reduce their problem loan ratios since Dec. 31 by selling some loans and by restructuring others to enable borrowers to return to current status.
Jim Freer is senior contributor to CondoVultures.com who writes a weekly column that appears every Thursday. Freer is a veteran financial journalist in South Florida and a consultant to the financial services industry. He can be reached at JimFreer@aol.com. Don't forget to sign up for our weekly Market Intelligence Report newsletter.
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