During the last downturn, it was the banks that failed. This time, it is the banks that are being asked to prevent everyone else from failing.
As coronavirus morphs from a health crisis to an economic one, local lenders are taking steps to prevent a likely recession from turning into a full-blown depression.
“We’re likely in a recession, sure. But don’t use the ‘D’ word,” said Ken Thomas, a longtime local banking expert and president of the Community Development Fund. “The banks are getting through this stronger than ever, much stronger,” he said. “And community banks are stepping up.”
It’s a reversal of the last crisis, when banks helped deepen the downturn by dramatically lowering requirements for home loans. The practice resulted in waves of foreclosures. Many banks could not survive the bad debt on their books.
In the aftermath, new capitalization rules were established that are now helping banks weather this storm.
And having learned from past mistakes, banks — especially community banks — are taking a more proactive approach to assisting clients in distress.
It is community banks that have sent out some of the first checks under the initial $350 billion Paycheck Protection Program. The loans are capped at a 1% interest rate and can be as large as 2.5 times the size of a business’s monthly payroll.
While there is no set definition of a community bank, most are locally owned and operated, and privately held. This allows them to maintain close relationships with their customers and clients. While national banks are overseen by the Office of the Comptroller of the Currency, state-chartered banks — which include most community banks — are overseen by either the Federal Deposit Insurance Corporation or the Federal Reserve.
According to Bauer Financial, a banking consultancy, there are 24 community banks in Miami-Dade and five in Broward, with another two dozen credit unions across South Florida. (Credit unions offer services similar to banks but are not-for-profit institutions.)
First National Bank of South Miami, a longtime local lender, estimates that the $63.2 million in PPP loans it has approved have saved the jobs of nearly 6,000 workers at 278 area businesses.
“We are very proud to have 54 staff members committed to this [PPP] initiative to help as many businesses as we can,” said Veronica Flores, chief operating officer of First National Bank of South Miami. “Each day I send them updates of how many jobs we are saving for our friends and neighbors in our community. Although I asked the team to take time off for the [Easter] holiday weekend, I was moved to see so many continuing to work for the good of our community.”
Tropical Financial, a Broward-based credit union with nine South Florida branches, says it is also working closely with members who may be in financial distress.
“We’re very strong financially, that’s why we can offer to extend payments, or provide low or 0% loans to help,” said Keith Troup, Tropical’s chief operating officer.
At the same time, three key themes are emerging among local financial institutions. The first is a pivot away from lending to riskier projects and toward safe-haven assets. Also, banks who may have exposure to vulnerable segments like hospitality are working to contain losses. And finally, the wealthiest investors who may have been sitting on the sidelines are consolidating gains.
Flight to quality
Most of a bank’s cash flows come through loans. And in South Florida, most lending goes to lending for homes on the consumer side and larger real estate development projects on the commercial side.
As the economic fallout from the coronavirus crisis continues, local lenders are prioritizing their highest quality projects and assets, while letting other projects fall by the wayside.
“There are a whole bunch of [projects] that continue to be [approved] because of the quality of sponsorship, the quality of the property and location,” said Ezra Katz, founder and CEO of Aztec Group, a Miami-based real estate investment and merchant banking firm. “That will continue to get the attention of investors and lenders.”
For instance, a $100 million mixed-use residential and retail project in a suburban location that Aztec helped finance will move forward, thanks to the “impeccable” quality of the parties involved.
Jay Sakalo, a partner at Miami-based law firm Bilzin Sumberg and group leader of its business finance and restructuring and corporate practice, said that similar to the last recession, lenders will now become much more cautious and attuned to the ability of investors to weather further downturns. Even someone who proposes a traditionally high-performing project will now have to have a track record, he said.
“Lenders…will be very asset-class and sponsor specific,” he said.
The same goes for neighborhoods: Projects in up-and-coming areas that may have seemed a worthy gamble will now be viewed with greater scrutiny, Sakalo said.
“A new project in a developing area, or the next cutting edge area — a lender is now going to look at that and say, ‘Let’s make sure it’s going to become a developed area.’ That is something I could see a lender is taking that position.”
One impact on consumers: stricter lending standards on homes, cars or credit cards. American Banker reported earlier this month that Bank of America raised its credit score minimum for home loans from 660 to 720.
Since the Great Recession, private lenders, such as family wealth offices, insurance companies and private investment funds have taken over large swaths of lending that used to be done by banks prior to the financial crisis. Worldwide, the private lending industry has ballooned to nearly $1 trillion. Miami gets a hefty share of the action, thanks to its proximity to Latin America and its favorable tax policies.
Sakalo says that while this sector is largely unregulated, the majority of institutions that participate in private lending maintain strong capital reserves — and therefore are likely in a similar position as traditional banks.
But others say there’s no way to know for sure.
“So much has moved outside the banking system,” Daniel Ades, founder and managing partner of Aventura-based Kawa, an asset management firm. “There’s going to be a tremendous loss of capital by foreign investors. I’m less worried about lenders, but the loss of capital is going to be significant.”
The upshot, Ades said: “Miami was a very hot market, and it’s going to suffer.”
LESSONS LEARNED
In the last crisis, about 70 Florida banks were forced to shutter their doors. That list doesn’t include out-of-state lenders like Corus Bank, a Chicago-based institution that nevertheless managed to flood the South Florida market with mortgage loans that turned sour.
“During the last crisis, it was Corus,” said Thomas, the local banking expert. “This time, if we had a crisis with high-rises, we’d be in a similar place. But now, you’ve got people living in their homes, and obviously now staying at home.”
There will always be risky projects in a market like Miami, Thomas said. And data suggest a local condo glut was already in the making. But on the whole, he said, “We’re not anywhere near” where the market was last time around.
And many of the banks lending to Miami’s most heavily hit industries, like hospitality groups and cruise companies, are out of state.
Eddy Arriola, chairmand and CEO of Apollo Bank says there is one major difference between this crisis and the last: The Fed has deployed massive ammunition to provide support to banks by buying debt off their books. This, in turn, gives banks a cushion to support lenders.
Banking regulators also are actively encouraging banks to work out deals with as many stressed borrowers as possible by deferring payments. When these deferrals are executed, regulators are telling banks they will not be penalized.
“Regulators have deemed banks as the first line of defense of this economic war, and they’re being incredibly supportive by providing ample liquidity,” Arriola said. “It’s really been incredible.”
As a result, even banks deemed at risk say they remain in a relatively healthy position. Bauer Financial has rated OneUnited Bank, the only majority black-owned bank in the nation, among the most at-risk lenders among financial institutions with a presence in Florida. But in a statement OneUnited — which has a branch in Miami-Dade — said it remains stable.
“OneUnited Bank is fully operational and seeing an increase in deposit customers as more people are seeing the benefits of online and mobile banking,” said Teri Williams, President & COO of OneUnited Bank, in an emailed statement. ”We are focused on the health and well-being of our customers and employees.”
HOSPITALITY EXPOSURE
That does not mean that all bank clients are out of the woods. For instance: As an increasing number of hotels shut down, they are likely to miss payments to lenders.
“With our tourist-dependent local economy, it will no doubt be a challenge for all of us, but we are confident our banks will help all of us navigate these uncharted waters,” Bauer’s president Karen L. Dorway said.
Arriola says that if one assumes that hotels will eventually come back online, there is only a short-term pinch in letting a client postpone a payment as long as there is confidence they’ll come back online in the next six months or so.
“You saving them one month’s rent — to them it’s a big deal,” he said. “To a bank, one payment doesn’t mean anything.”
Paul Merski, ICBA’s Group Executive Vice President of Congressional Relations and Strategy, said that thanks to banks’ strong capital position heading into the crisis, many lenders are offering as many as three months’ forbearance to customers or small businesses who are struggling with cash flows.
Still, there is a limit to what these banks can withstand — especially ones with exposure to retail and hospitality-dependent cash flows.
“A lot of what community banks do is commercial lending — so a strip mall or commercial property loan, that’s usually held by a community bank. So that’s under stress,” he said. “If you can’t pay the landlord the rent, and the landlord can’t pay the bank on the loan, that’s something we’re watching very closely.”
On Wednesday, reports emerged that a $1 billion loan tied to the Fontainbleau Miami Beach had gone into special servicing, a form of refinancing that can sometimes precede a default.
Many retail leaseholders, from small mom-and-pops to large chains, are asking landlords for rent relief, according to Jonathan Carter, executive managing director for retail services in South Florida at Colliers International, a real estate group.
“Some of those requests are justified, but some may just be cash grabs and attempts to save money,” Carter said, “So right now, it’s hard to figure out who really needs help, and who’s just trying to gratuitously ask.”
Miami’s retail sector — and any lenders with large stakes in it — likely will take an outsized hit, according to Barbara Denham, a senior economist at Moody’s Analytics Real Estate Investment Services. In the years leading up to the crisis, Miami-Dade found itself “over retailed,” Denham said. Even as retail consolidated into higher quality destinations, more of Miami’s workforce — 12% — worked in retail. That’s 2% more than the national average.
“So Miami will suffer disproportionately more from all the closures,” Denham said.
PICK OF LITTER
As the world halted in March to take stock of the crisis, Centennial Bank says it essentially froze all lending. (Though based in Arkansas, Centennial and holding company Home BancShares have a substantial Florida portfolio.) That is no longer the case, said David Druey, division president.
“We’re still seeing larger construction projects move to approval, because we figure those will take 18 to 24 months to come online,” he said. “We’re doing deals that we weren’t doing [a month] ago, because at that point, everyone was just glued to their TVs and trying to figure out what was going on.”
In fact, as a cash crunch hits some borrowers, others are willing to come in to buy out properties as well as make loans themselves.
“If someone puts up an asset, a guy with a lot of credit can now pretty much buy whatever they want to buy at their discretion,” Druey said.
Karl Ruppert, managing director of UBS private wealth management in Florida, agrees. Ultrahigh net worth families, with at least $100 million or more, have relatively little exposure to the stock market; much of their holdings are in private equity investments or other alternative investments like real estate.
“We’re seeing unsolicited offers…for not just one business but entire territories,” Ruppert said. In one case, an entrepreneur is bidding for an entire region’s local pizza franchise, he noted.
These individuals are looking for long-term value, he said, so short-term volatility is not something they’re going to obsess over.
“I think there’s a fortune to be made here, and those who are brave and visionary and have a long-term focus are going to do very well,” he said.
Miami-Dade headquartered banks
Banks are listed according to asset size. The highly respected Bauer Rating is assigned by Coral Gables-based Bauer Financial through a proprietary formula that factors in a bank’s capital ratio, profitability, and delinquency rates, among other measures.
BANKUNITED
Bauer rating: 5 stars
Total assets: $32.8 billion
Year established: 2009
CITY NATIONAL BANK OF FLORIDA
Bauer rating: 5 stars
Total assets: $15.8 billion
Year established: 1970
AMERANT BANK N.A. (formerly Mercantil Bank)
Bauer rating: 5 stars
Total assets: $8 billion
Year established: 1979
OCEAN BANK
Bauer rating: 5 stars
Total assets: $4.3 billion
Year established: 1982
BAC FLORIDA BANK
Bauer rating: 5 stars
Total assets: $2.3 billion
Year established: 1973
BANESCO USA
Bauer rating: 4 stars
Total assets: $1.7 billion
Year established: 2006
US CENTURY BANK
Bauer rating: 5 stars
Total assets: $1.3 billion
Year established: 2002
PROFESSIONAL BANK
Bauer rating: 5 stars
Total assets: $1 billion
Year established: 2008
FIRST NATIONAL BANK OF SOUTH FLORIDA
Bauer rating: 5 stars
Total assets: $853 million
Year established: 1952
HELM BANK USA
Bauer rating: 5 stars
Total assets: $842 million
Year established: 1989
INTERNATIONAL FINANCE BANK
Bauer rating: 4 stars
Total assets: $780 million
Year established: 1983
APOLLO BANK
Bauer rating: 5 stars
Total assets: $745 million
Year established: 2001
GROVE BANK & TRUST
Bauer rating: 5 stars
Total assets: $717 million
Year established: 1926
Miami-Dade headquartered credit unions
SOUTH FLORIDA EDUCATIONAL F.C.U.
Bauer rating: 5 stars
Total assets: $1.2 billion
Year established: 1935
DADE COUNTY FEDERAL CREDIT UNION
Bauer rating: 5 stars
Total assets: $784 million
Year established: 1991
UNIVERSITY CREDIT UNION
Bauer rating: 5 stars
Total assets: $209 million
Year established: 1947
JETSTREAM FEDERAL CREDIT UNION
Bauer rating: 4 stars
Total assets: $192 million
Year established: 1948
MIAMI POSTAL SERVICE CREDIT UNION
Bauer rating: 5 stars
Total assets: $140 million
Year established: 1991
MIAMI FIREFIGHTERS F.C.U.
Bauer rating: 5 stars
Total assets: $113.1 million
Year established: 1935
BAPTIST HEALTH SOUTH FLORIDA F.C.U.
Bauer rating: 5 stars
Total assets: $65.4 million
Year established: 1961
UNITED POLICE FEDERAL CREDIT UNION
Bauer rating: 5 stars
Total assets: $46 million
Year established: 1936
MIAMI FEDERAL CREDIT UNION
Bauer rating: 5 stars
Total assets: $35.7 million
Year established: 1954
COMPASS FINANCIAL F.C.U.
Bauer rating: 4 stars
Total assets: $19.7 million
Year established: 1936
HIALEAH MUNICIPAL EMPLOYEES F.C.U.
Bauer rating: 5 stars
Total assets: $11.7 million
Year established: 1951
SHAW-ROSS EMPLOYEES CREDIT UNION
Bauer rating: 5 stars
Total assets: $6.4 million
Year established: 1982
ELECTRICIANS LOCAL 349 C.U.
Bauer rating: 5 stars
Total assets: $4.6 million
Year established: 1947
Broward headquartered banks
AMERICAN NATIONAL BANK
Bauer rating: 5 stars
Total assets: $305 million
Year established: 1985
DESJARDINS BANK N.A.
Bauer rating: 5 stars
Total assets: $221 million
Year established: 1992
NATBANK N.A.
Bauer rating: 5 stars
Total assets: $194 million
Year established: 1994
OPTIMUM BANK
Bauer rating: 3 stars
Total assets: $126 million
Year established: 2000
HOME FEDERAL BANK OF HOLLYWOOD
Bauer rating: 3 stars
Total assets: $56 million
Year established: 1998
Broward headquartered credit unions
POWER FINANCIAL CREDIT UNION
Bauer rating: 5 stars
Total assets: $840 million
Year established: 1951
TROPICAL FINANCIAL CREDIT UNION
Bauer rating: 5 stars
Total assets: $741 million
Year established: 1935
BRIGHTSTAR CREDIT UNION
Bauer rating: 5 stars
Total assets: $518 million
Year established: 1946
WE FLORIDA FINANCIAL CREDIT UNION
Bauer rating: 4 stars
Total assets: $513 million
Year established: 1953
PRIORITY ONE CREDIT UNION
Bauer rating: 5 stars
Total assets: $100 million
Year established: 1991
SUN CREDIT UNION
Bauer rating: 5 stars
Total assets: $88.3 million
Year established: 1946
CONNECT CREDIT UNION
Bauer rating: 5 stars
Total assets: $78.2 million
Year established: 1962
BROWARD HEALTHCARE F.C.U.
Bauer rating: 5 stars
Total assets: $72 million
Year established: 1957
MEMORIAL EMPLOYEES F.C.U.
Bauer rating: 5 stars
Total assets: $69 million
Year established: 1971
CORAL COMMUNITY F.C.U.
Bauer rating: 5 stars
Total assets: $33.1 million
Year established: 1975
POMPANO BEACH CITY E.C.U.
Bauer rating: 5 stars
Total assets: $23.5 million
Year established: 1991