After years of pristine credit quality, banks throughout Florida are reporting higher levels of past-due loans as a result of the slowdown in the housing sector.
"Credit quality, from our perspective, has shifted from a driver of earnings to a headwind," said Jackie Reeves, a managing director at BankAtlantic Bancorp Inc.'s Ryan, Beck & Co. Inc. in Boca Raton, Fla.
Florida commercial banks saw loans 30 to 89 days past due jump 25% in the third quarter from the second-quarter level, according to data from FIG Partners LLC, Highline Data, and SNL Financial. Many of these loans are construction loans on housing and condominium developments.
Also, more homeowners are struggling to pay their mortgages. The Mortgage Bankers Association reported last week that 4.17% of loans on one- to four-family homes in Florida were past due in the third quarter, up from 3.6% the year earlier.
Many observers said they expect credit quality to get worse, as the market normalizes after years of unsustainably low levels of problem loans, before improving.
"The general thought is: We haven't seen anything yet," said James Record, an analyst at Sterne, Agee & Leach Inc. "We have seen an uptick, but … I think it's going to get a lot worse."
Despite the rise in past-due loans, observers say, however, that it is too early to hit the panic button, because overall credit quality remains strong at Florida banks.
Through Sept. 30 nonaccruing loans averaged only 0.3% of the total, according to FIG Partners, and the share of past-due loans on one- to four-family homes in Florida remained below the national average of 4.84%, according to the mortgage bankers group's National Delinquency Survey.
"Yes, [credit quality] has weakened," Ms. Reeves said. "But we're still talking about historically low levels of net chargeoffs."
BankUnited Financial Corp. in Coral Gables was among the midsize public companies in Florida reporting an uptick in past-due loans during the third quarter.
In early September, the $13.5 billion-asset banking company was put on the defensive after a borrower - the homebuilder Technical Olympic USA Inc. - warned it might have trouble making payments on a $675 million syndicated loan that had been arranged to finance development of 35,000 single-family homes and townhouses throughout Florida.
Seacoast Banking Corp. of Florida, in Stuart, announced Oct. 24 that it had put a $9.6 million loan on nonaccrual status because the borrower was "experiencing financial difficulties."
Federal Trust Corp., a $723 million-asset company in Sanford, Fla., announced Nov. 2 that two multimillion-dollar loans had soured. And a week later the $6.2 billion-asset BankAtlantic in Fort Lauderdale, announced a $26.6 million land acquisition and development loan was not performing.
Bankers admit that times have gotten tougher but argue that credit quality is relative.
"It's not hard to see a deterioration in credit quality when your problem assets have been, in essence, at zero for the last 10 years," said Dennis S. Hudson 3rd, the chairman and chief executive officer of the $2.3 billion-asset Seacoast. "But we've certainly hit a headwind with slowing [real estate markets] that we're feeling now throughout the state."
Mr. Record of Sterne Agee said he expects credit quality in Florida to keep deteriorating.
"I think a year from now we'll see nonperforming numbers that are at least more in line with historical averages - if not worse," he said. "It's a cyclical business, and we haven't had a credit cycle really in more than a decade. I just think it's overdue."
Raymond Powell, the president of the $1.7 billion-asset Peoples First Community Bank in Panama City, Fla., agreed. "You're seeing a longer time on the market for houses," he said. "And it's causing builders to not be able to turn their inventories quickly, and some of them are straining a little bit to make their interest payments."
Loans 30 to 89 days past due at Peoples First more than doubled, to $2.3 million, in the 12 months through Sept. 30. And they jumped to $3.5 million, from $2 million, at Riverside National Bank of Florida, in Fort Pierce.
Cindy Robbins, the $4.2 billion-asset bank's chief operating officer, said she expects credit quality to decline further. "I don't think it's panic time; it's just: Be cautious," she said. "Don't stop doing the good credit processes that you have [been doing], and if anything, don't tighten up so much that you choke yourself or the market."
Some banks have already begun to limit their exposure to residential real estate.
"Our read on the market is that there are too many houses out there now, so why add more inventory?" Mr. Powell said. "It's not a response to problem assets as much as it is to prevent having problem assets."
Despite the discouraging credit-quality trend, bankers remain confident in their institutions', and their state's, future. Observers pointed to Florida's low unemployment rate and its daily net gain of roughly 1,000 people as evidence that the state's economy remains strong.
"At the end of the day, we'd rather be here than anywhere else," said Chip Black, the president and CEO of First Community Bank of SouthWest Florida, a $252 million-asset bank in Fort Myers.
