Miami ice: Florida banks face possible seizure
Sunshine State's long-term allure may have delayed wave of bank closures
05/15 12:17 PM
SAN FRANCISCO (MarketWatch) -- BankUnited Financial (BKUNA:$0.8016,$-0.0784,-8.91%) , the largest lender based in Florida, warned earlier this week that it could be seized by regulators. Many smaller banks might face a similar gloomy fate as the real estate crisis lingers in the Sunshine State -- but there is a ray of hope.
When Florida's real estate slump finally ends, the state could still be a very attractive place for banks to do business. Indeed, some experts say the long-term allure of the state may be the main reason why so few Florida banks have failed so far -- and why a bidding war for BankUnited may still be brewing.
"We have many problem banks and we may be losing our biggest," said Kenneth Thomas, a banking expert and economist based in Miami. "But when things get better, Florida will come back strong and those who are positioned well in the banking sector will benefit."
A Florida recovery seems a long way off, though.
In Miami, homes are staying on the market for nearly 250 days on average, by far the slowest inventory turnover of ten major U.S. cities tracked by Altos Research. Miami has experienced the slowest market turnover every month since September 2007.
Bauer Financial, which tracks the health of U.S. banks, rated 58 Florida-based banks "problematic" or worse at the end of 2008.
BankUnited, based in Coral Gables, garnered Bauer's lowest rating. Miami-based Ocean Bank, one of the largest independent commercial banks in Florida, and Orion Bank, a big community bank in Naples, also got Bauer's lowest rating as of the end of last year.
On the regulatory front, the Federal Deposit Insurance Corp. said May 8 that it's opening an office in Jacksonveill with space for 500 temporary staff and contractors. The new location will help the regulator "manage receiverships and to liquidate assets from failed financial institutions primarily located in the eastern states," it said.
More than 5% of loans made by Florida banks were either delinquent or not accruing at the end of last year, according to the FDIC. That was up from 1.98% a year earlier.
Residential mortgages made up 145% of these banks' tier 1 capital, while commercial real estate loans -- a bigger concern for regulators these days -- made up 449% of tier 1 capital, according to the FDIC.
And Florida banks' commercial real estate exposure is larger than banks in other problem states such as California, Nevada and Arizona, FDIC data show.
Root of the problem
The main problem in Florida has been over-building: There are still too many new homes, condominiums and commercial real estate projects to be sold in the face of waning demand.
Billionaire Warren Buffett said earlier in May that there were some signs of stabilization in the housing market, particularly in California, citing data from Berkshire Hathaway's (BRK/A:$90,200.00,00$600.00,000.67%) real estate brokerage business, which is one of the largest in the U.S.
However, Buffett also warned that the real estate market in southern Florida could be a problem for a long time, because of the huge supply of recently built, unsold properties.
Unfinished condo projects are particularly tricky for Florida banks to deal with, according to Karen Dorway, president and director of research at Bauer Financial in Coral Gables.
If a bank takes possession of a half-built condo project with 20% of the units sold, it has to finish the construction, find someone to manage it, deal with condo associations that may have already formed and then try to sell all the remaining units, she explained.
That's a lot tougher than repossessing a single-family home, she added.
"We're starting to see pockets of improvement nationwide, but in Florida there's a huge amount of surplus property that's been built," Dorway said. "We have to get through the inventory, and half-built projects have to be dealt with."
It's a problem affecting other banks based outside Florida that have been active in the state.
Chicago-based Corus Bancshares , which was a leading lender for condo construction in cities including Miami, warned on May 1 that banking regulators may place it into "conservatorship or receivership."
The FDIC considers 252 U.S. banks troubled, and economist Thomas reckons that could rise to roughly 300 soon, with about 10% of those in Florida.
And yet, only four Florida banks have been closed since the beginning of 2007, according to the FDIC. In neighboring Georgia, 12 have failed and nine have been seized in California during the same period.
Georgia was particularly "over-banked" and has other idiosyncrasies that may have caused more bank failures in that state.
'Inherent value'
However, Thomas said bank regulators may have held off closing some Florida banks because there's more value to such lending businesses located in the state.
One of the most populous states, Florida has a fast-growing Hispanic community. These two attributes make it one of the states that any major U.S. bank must be in to became a leading player in the business, Thomas explained.
"A Florida franchise has inherent value unlike most other states," Thomas said, noting that this may be why regulators haven't shut down BankUnited yet.
"Regulators have been slow to pull the trigger," he added. "They feel that there's enough franchise value there for them to get somebody to acquire it while it's still open."
Spokesmen at the FDIC and the Office of Thrift Supervision, which regulates BankUnited, declined to comment specifically about the bank.
However, OTS spokesman William Ruberry said the regulator always tries to help struggling banks re-capitalize before shutting them down.
"We do everything we can when institutions are open and operating to help them find other sources of capital if needed," he explained.
Indeed, there are several bidders interested in BankUnited.
Goldman Sachs Group (GS:$134.4200,$0.8200,0.61%) has reportedly teamed up with Toronto-Dominion Bank (TD:$40.63,00$-0.42,00-1.02%) to work on a potential bid. A Goldman spokesman declined to comment.
Bloomberg News said Thursday that a group of private-equity firms led by John Kanas, the former chief executive of Long Island, N.Y.-based North Fork Bancorp, expressed an interest in acquiring BankUnited. However, they want to purchase the lender once it goes into receivership, Bloomberg noted.
Other potential bidders include private-equity firm J.C. Flowers & Co., Bloomberg added.
"Banking in Florida is still going to be difficult for some time," Dorway said. "But long term, Florida will be a good place to bank."
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