South Florida Bank's $112M Quarterly Loss Could Be Just The Start
By Brian Bandell
It might seem bleak, but South Florida-chartered banks have a combined $112 million quarterly loss.
The question is whether banks shortchanged their loan loss reserves – giving them a better bottom line for now, but the potential for bigger future losses. Prolonged agony for the region's banks could make it more challenging for businesses to get loans.
“We’re in a recessionary economy where things will get worse before they get better,” Miami-based banking analyst Kenneth H. Thomas said.
A key ratio for banks is the amount of reserve capital set aside for future loan write-offs compared to non-current loans.
Nationally, banks' reserve capital equals 89 percent of non-current loans, which is a 15-year low, Federal Deposit Insurance Corp. data.
Among South Florida's 79 banks, the ratio fell from 57.8 percent in the first quarter to 39.5 percent in the second quarter.
Unfortunately, South Florida's housing market is one of the worst in the nation and a looming question is just how many mortgages banks will have to write off.
Thomas said he likes to see banks have reserve capital equal to 50 percent of non-current loans, but 12 of the region's 30 largest banks had a ratio below 50 percent. Six of these were below 33 percent, FDIC data shows.
Thomas' analysis found Florida banks had the fourth-lowest ratio in this measure among other states and U.S. territories.
Many South Florida banks did not keep up with the rising tide of delinquent loans in the second quarter.
Local banks were burdened with $2.3 billion in non-current loans as of June 30, up $942 million, or 69 percent, from the first quarter. Coral Gables-based BankUnited, the region's largest bank, and Miami-based Ocean Bank, the region's fifth-largest, accounted for 60 percent of the non-current loans in the region.
Overall, 3.92 percent of all loans by South Florida banks were non-current, up from 2.36 percent in the first quarter. Industrywide, the non-current rate in the second quarter was 2.02 percent – the highest it’s been since 1993.
In the face of all those non-current loans, South Florida banks increased their combined loan loss allowance reserves 15.5 percent, to $910.6 million. That, plus $189.6 million in charge-offs for bad loans, made their losses deepen from $15.4 million in the first quarter to $112 million in the past quarter.
It could have been much worse for many banks if they kept their reserves up.
To cover just half of their non-current loans as of June 30, South Florida banks would have needed to add an additional $242 million to reserves, which would have deepened losses by that much more. To maintain their 57.8 percent ratio from the prior quarter, it would have cost them $421 million. If they wanted to meet the 89 percent average for national banks – most of which do business in real estate markets that are hurting less than in South Florida – it would have taken $1.14 billion.
Federal regulators are putting more pressure on banks, especially those in Florida, to more adequately build reserves for non-current loans, said Michael Lozoff, a partner with the Miami-based law firm Adorno & Yoss and the chairman of its financial institution section, which advises more than 100 banks and credit unions. When regulators see delinquent loans soar and property values fall below loan amounts, they want to ensure banks are not maintaining the illusion of profitability by delaying the charge-offs for those problem loans, Lozoff said.
BankUnited is being pressured by regulators as its loan loss reserve slips to below one-quarter of its non-current loans.
Even though BankUnited regulatory capital ratios fall within what the FDIC usually considers well capitalized, the Office of Thrift Supervision told the bank on Sept. 5 it has been downgraded to adequately capitalized. Regulators are concerned about its residential mortgage portfolio and whether the bank will be successful inn raising $400 million in capital to cover additional delinquencies, according to a BankUnited SEC filing.
Local South Florida Markets Feel The Fannie Mae, Freddie Mac Takeover
By Ed Duggan
The potential beneficiary of the federal takeover of Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) is the South Florida's housing market.
Rates on 30-year mortgages fell about half a percentage point – to 5.88 percent – after the takeover was announced, and jumbos were down 31 basis points to 7.08 percent, according to North Palm Beach-based Bankrate.com.
“Short term, the effect is likely to be 30-year mortgage interest rates down by as much as
1 percent, now that government guarantees all the paper,” said real estate analyst Jack McCabe, CEO of Deerfield Beach-based McCabe Research & Consulting. “But, it doesn’t mean that everyone who can fog a mirror will get a loan.”
Rei Mesa, president and COO for Sunrise-based Prudential Florida Realty, which did $7 billion in sales last year, said: “Short term, it should mean better rates, longer term is too early to call. Will they loosen the requirements for qualifying? That’s the question.”
Chappy Adams, president of Illustrated Properties in Palm Beach Gardens, expects more people to qualify, which should help sales.
Scott Agran, president of Boca Raton-based Lang Realty, said: “I think, long term, it will add liquidity and be a big confidence-builder for the real estate industry and our local markets.”
He cites a lack of confidence as the biggest factor among potential buyers who are now sitting on the fence.
“It’s funny,” he said. “A house that sold for $800,000 three years ago had buyers in a pack vying to buy it. Now, there is a prevailing mood where move-up buyers are afraid to buy that same house for $500,000 because the herd is gone.”
BE Aerospace Inc. Doing Well But Airlines Are Suffering
By Bill Frogameni
At a time when the airline industry suffers from high fuel prices and lower travel demand, Wellington-based B/E Aerospace is thriving.
Ranked No. 14 on South Florida Business Journal's 2008 list of largest public companies, the manufacturer of airplane fasteners, seats and cabin interiors reported record second quarter net sales of $522.2 million, a year-over-year gain of 31 percent. Net income shot up to $53.9 million from $28.4 million in the second quarter of 2007 – a 47 percent gain. B/E’s second quarter ended June 30.
Analysts largely view B/E’s performance as positive.
“We have five segments,” company spokesman Greg Powell said. “All segments posted pretty healthy revenue growth.”
The largest percentage gain came in B/E’s business jets division, where net sales increased 62.7 percent – to $72.4 million from $44.5 million in the second quarter of 2007. The largest segment overall is the seating segment, which posted $183.4 million in net sales for the quarter, a year-over-year gain of 26 percent.
But, as airlines take some planes out of service, “there’s a potential for revenue being down 1 to 2 percent next year,” Powell acknowledged.
Wolfgang Demisch, an aerospace industry consultant with Demisch Associates LLC, said the market B/E serves is dependent upon the long-term health of the larger air transport industry and new orders, but B/E has some insulation due to its strong aftermarket business. The many parts that hold airplanes together need to be replaced at intervals – and B/E sells those parts, Demisch noted.
“You could argue that if you slow down on new aircraft sales, then you have to spend a little more money on refurbishing old ones,” he said. “B/E will get business at a pretty good clip, even if you’re not selling brand-new airplanes.”
B/E’s customers will receive more new planes than they will retire next year, Powell said.
Troy Lahr, an aerospace analyst with Stifel, Nicolaus & Co., said B/E’s strong quarter is due, in part, to its seating business.
“I think you’re seeing strong market demand for their seats both on the new airline market and retrofit [sector],” he said. “We’re positive on B/E Aerospace here. They’re a very well balanced company.”
Stifel, Nicolaus & Co. gives B/E stock a “buy” rating, he said, adding that B/E should experience “pretty healthy growth” into 2009 and even 2010.
A July 29 Credit Suisse report also gives an upbeat assessment. Credit Suisse’s analysts rated B/E’s stock at “outperform.”
The purchase of Honeywell’s parts distribution business, completed in July for $1.05 billion, may also contribute to B/E’s long-term health. Not only will the deal make B/E a bigger distributor, but military-related sales should increase to about 10 percent of total company sales, up from about 5 percent to 6 percent, Powell said. “This Honeywell deal seems like a pretty good bet,” Lahr said.
In spite of the growth, B/E’s stock price has struggled since December 2007, when it traded at a high near $54. This year, the stock has fluctuated mostly downward, lingering in the $20s for most of the summer.
Demisch said investors consider the health of the larger air transport industry when evaluating B/E’s stock, even though B/E is shielded somewhat from the more immediate fluctuations that face commercial airlines.
“They’re certainly more insulated from some of the pressures than someone like American or United Airlines,” Demisch said.