By Jim Freer
Senior Contributor
CondoVultures.com
South Florida bank stocks took a beating during this year’s first quarter, with prices of several major banks falling more than 20 percent amid investors’ continuing concerns about the real estate markets.
An analysis by Condo Vultures® LLC shows that only two of the five South Florida-based banks that trade on major markets saw their share prices rise in the first quarter of 2008. Prices fell for all 11 out-of-state banks with more $1 billion in South Florida deposits operating in the tri-county region of Miami-Dade, Broward and Palm Beach, according to the research .
This year’s declines follow 2007’s big drop in share prices for most of these banks, especially during the second half of the year when many financial institutions began reporting major losses on sub-prime mortgages.
Industry watchers said prospects are slim that prices of most of these banks and of the entire banking sector will stage a big recovery this year.
The bearish market for bank stocks is among reasons why analysts expect banks are unlikely anytime soon to loosen their lending standards, including on residential mortgages, and will find it difficult to add branches and expand other operations.
With lower prices and market capitalizations (number of shares multiplied by price) banks will inevitably have less so-called currency to buy other banks, said Christopher Marinac, director of research at Atlanta-based research firm FIG Partners.
This year, stocks of banks with large residential mortgage holdings have generally performed worse than other banks.
Most of the 16 banks analyzed by Condo Vultures® have significant residential mortgage or other real estate exposure in Florida, and thus have been part of the stock decline.
Some larger banks analyzed posted gains April 1, the first day of the second quarter, after some institutional investors began to buy financial stocks following news that Lehman Brothers and Swiss-based UBS would be have new stock offerings.
Unfortunately, that buying might prove to be one of the occasional blips of good financial news among a series of disturbing reports about the U.S. economy and world financial markets.
There also are indications that “smaller might be better” for bank stocks in the current market.
Boca Raton-based Sun American Bancorp (Nasdaq: SAMB) and Fort Lauderdale-based Optimum Bank Holdings Corp. (Nasdaq: OPHC) are the two South Florida bank stocks that rose during the first quarter of 2008. Both have relatively low numbers of shares and are lightly traded.
On the flip side experiencing a drop in share price are Coral Gables-based BankUnited (Nasdaq: BKUNA) and Coral Gables-based Great Florida Bank (Nasdaq: GFLB), which are among the 508 in the Nasdaq Bank Stock Index, and BankAtlantic, which is traded on the New York Stock Exchange.
A look at that index and at the KBW Bank Index, of 24 large banks, shows how bank stocks began slumping sooner than the overall stock market.
The Nasdaq Bank Stock Index fell 4 percent during this year’s first quarter. This followed a full-year decline of 22 percent in 2007.
The KBW Bank Index fell 5 percent during this year’s first quarter, following a 25 percent decline for 2007.
Of the 11 large banks analyzed by Condo Vultures® only Colonial Bank and HSBC are not part of the KBW Index, which is tracked by investment bank Keefe, Bruyette & Woods.
The S&P 500, which includes most of the KBW banks, fell 10 percent during this year’s first quarter. The S&P, widely viewed as the broadest gauge of the U.S. market, had a 4 percent rise in 2007.
Acquisitions by banks from other states have resulted in the small number of publicly traded banks in South Florida – where decades of growth have made local banks – take-over targets.
BankUnited and Fort Lauderdale-based BankAtlantic are often the subjects of such rumors, amid extensive coverage by analysts and interest from institutional buyers of bank stocks.
BankUnited, the largest bank based in Florida, fell 27 percent from $6.90 to $5.01 during this year’s first quarter. After ending 2006 at $27.96, the stock had a 12-month price decline of 75 percent to $6.90 per share.
BankUnited has gained national attention because for several years it was one of the country’s biggest lenders of option adjustable-rate mortgages. These loans permit borrowers to pick different payment totals each month, and in some cases permit build-up of unpaid interest, as well as deferred principal.
Since last year, BankUnited’s rising delinquencies on option ARMs have led to a decline in its stock price.
Analyst Albert Savastano of Fox-Pitt Kelton in New York has an In-Line rating for BankUnited. This means Savastano expects the stock to perform in the same range as other savings banks in its size range during the next 12 months.
Savastano has a 12-month price target of $6.00 for BankUnited, while citing concerns about increasing mortgage delinquencies and foreclosures for the bank.
BankAtlantic’s stock ended 2006 at $13.81, and fell 70 percent to $4.10 over the next 12 months
in 2007. During the first three months of 2008, BankAtlantic’s stock price dropped another 5 percent to $3.91.
Amid the homebuilding downturn, BankAtlantic has placed several loans to developers on a nonaccrual status, meaning the bank cannot be certain of full payment of principal and interest. BankAtlantic has said those loans are in parts of Florida, but other than South Florida.
Savastano has an In-Line recommendation and a 12-month price target of $5.00 for BankAtlantic.
South Florida had a third prominent bank stock in West Palm Beach-based Fidelity Federal until Cleveland-based National City (NYSE: NCC) bought it last year.
National City experienced a 40 percent decline in stock price, decreasing from $16.46 to $9.95, to make it the largest drop among banks in the Condo Vultures® analysis.
National City has had one of the banking industry’s higher levels of charge-offs on sub-prime loans, mostly outside Florida.
On April 1, National City said it was considering unspecified “strategic alternatives.”
The following day, The Wall Street Journal which cited “people familiar with the matter” said National City is considering an outright sale to Cleveland-based KeyCorp (NYSE: KEY).
The former Fidelity Federal attracted several bidders because it had a low level of problem loans and was in a population growth market that larger banks coveted.
But FIG Partners’ Marinac projects that a recent U.S. Census Bureau report data on population shifts among U.S. counties could reduce the attractiveness of Florida-based bank stocks in general for money management firms and other institutional investors.
The U.S. Census Bureau estimates that in 2007 the number of people who moved out of Miami-Dade County was 40,128 more than the number who moved into the county.
That “negative in-migration” was 35,661 in Broward and 9,414 in Palm Beach County. The long-term trend of positive in-migration also changed for several other large Florida counties.
The U.S. Census Bureau cites high costs of property insurance and the impact of the real estate crisis as reasons for the shift.
Marinac thinks these numbers are “critical” for bank stock investors. In a March 31 report,
Marinac advised clients to consider this trend before buying Florida-based bank stocks in hopes that these banks might be sold if the merger market starts rebounding late this year or in 2009.
Jim Freer is senior contributor to Condo Vultures.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. Be sure to check out the Condo Vultures blog at CondoDump.com. Don't forget to sign up for our weekly Market Intelligence Report.
Copyright © 2008, Condo Vultures® LLC
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