Senior Contributor
CondoVultures.com
The first quarter results of South Florida banks and a new Federal Reserve national survey of lenders provide more evidence that the slow market for residential lending could continue through the rest of this year.
One key indicator of continued caution is that several South Florida-based publicly traded banks and several out-of-state banks with large branch networks in the region made large addition to their loan loss reserves during the first quarter.
Those provisions, which are subtracted directly from earnings, led to a quarter in which many banks profits were lower than the first quarter of 2007.
A review by CondoVultures.com of first quarter results also shows that numerous banks with South Florida operations reported increases in non-current loans – those 90 days or more delinquent or no longer accruing interest. Banks will have to restructure terms of these loans to help borrowers become current or take charge-offs that must be subtracted from their loss reserves.
As of May 7, some but not all South Florida-based publicly traded banks had released first quarter results.
An upcoming CondoVultures.com report, using information from banking analysts, will review the results and the implications for South Florida’s real estate market.
“Most analysts had predicted this would happen, with earnings and problem loans worse than in the fourth quarter,” said Ken Thomas, a Miami-based banking consultant with KH Thomas Associates.
During the first quarter, more banks began reporting increases in non-performing mortgages to “prime” borrowers and on home equity loans. During 2007, the banking industry’s increase in non-current loans was primarily in subprime residential mortgages and loans to homebuilders and condo converters.
One positive sign for the banking industry, in Florida and nationally, is that most banks continue to have capital well above levels that regulators consider “adequately capitalized” if not “well capitalized,” Thomas said.
This capital grew as most banks reported several years of strong earnings through 2006.
One key measure is the ratio of core capital – basically equity – to total assets. Federal regulators require banks to have a ratio of at least 4 percent to be adequately capitalized and at least 5 percent to be well capitalized.
For the composite 317 Florida-based banks, that ratio was 9.25 percent at the end of 2007, which was basically unchanged from a ratio of 9.24 percent on Dec. 31, 2006.
That composite number could drop sharply for this year’s first quarter, said Thomas, who advises banks in Florida and several other states on branch location and community lending strategies.
Some banks that keep adding reserves for several more quarters might have to shift money from their capital base if provisions are higher than a quarter’s net income.
The extent won’t be known until late May, when the Federal Deposit Insurance Corp. releases first quarter data for the banking industry and all banks.
Most South Florida-based banks are privately held. These banks usually announce little more than net income and quarter-to-quarter changes in assets and loans in quarterly releases they send out for use by daily newspapers.
“If capital ratios get weaker, it will be another reason why the credit crunch will get worse and banks will become more reluctant to lend,” Thomas said.
He said evidence of how that is happening is provided in the Fed’s “Senior Loan Officer Opinion Survey on Bank Lending Practices” for April.
The quarterly survey, released May 5, was based on responses from officials of 56 U.S. banks and 21 foreign banks with U.S. offices.
The Fed did not identify any banks, or provide information on lending trends by state.
In one discouraging sign, the majority of domestic banks reported they had tightened their lending standards on prime, traditional and subprime mortgages since January 2008, when the Fed’s most recent survey occurred.
“About 60 percent of respondents--a somewhat higher fraction than in the January survey--indicated they had tightened their lending standards on prime mortgages,” according to the report.
Prime mortgages, to borrowers with good credit histories, are a major source of funding for prospective buyers of South Florida condo units.
The Fed’s report comes as CondoVultures.com continues to see more banks in South Florida tighten that lending.
The Fed also said that about 70 percent of domestic respondents, somewhat higher than in January, indicated they had tightened standards for approving home equity lines of credit over the past three months.
In addition, the Fed said about 80 percent of domestic bank respondents and about 55 percent of foreign bank respondents reported they had tightened standards on commercial real estate loans between January and April.
The Fed said these numbers are similar to a previous survey that showed a tightening between October 2007 and January 2008 on commercial real estate.
That category includes loans for construction of single-family housing projects, condo buildings and commercial buildings. It also includes loans for condo conversions and for purchases of apartment buildings, office buildings and other commercial real estate.
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.
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