BY JIM FREER
Special Correspondent

It’s not just bankers who will determine when the residential and commercial real estate markets will begin a rebound in Florida and around the country.

Bank regulators always have major influence on banks’ overall strategies, and they have been taking actions that likely will result in many banks remaining cautious on lending for the remainder of this year.

As part of a stepped-up review process they began approximately two years ago, federal and state banking regulators are telling many banks to keep adding to their reserves to cover potential loan losses.

Those additions to reserves are taken from a bank’s quarterly earnings, or from capital during quarters when there are no profits.

That review of loan quality is part of what some bankers say is regulators being figuratively “in banks” that are having earnings problems. In some cases, they are instructing banks on lending strategies but not necessarily on making individual loans.

Regulators also are telling some banks to raise capital or reduce assets, to improve their capital-to-asset ratios.

For many banks that means making fewer loans and reducing asset size as other loans are paid off.

“It is hard to raise capital in this market, and some banks are going to have to go through shrinkage (reducing assets),” said David Seleski, president and CEO of Fort Lauderdale-based Stonegate Bank .

The Financial Accounting Standards Board , the accounting industry’s non-government rule making organization, also is in the “watch your lending” mix.

On June 12, it issued two rules that will make it harder for banks to take non-current loans off their books and put them into securities, and force them to put some loans back on their balance sheets.

That could raise some banks’ non-current loan ratios, and make them and their regulators more hesitant about lending.

All of this is part of a quandary that the federal government and banks have been trying to resolve since last year.

The Bush administration and then the Obama administration have been calling for banks to step up their lending to help jump start the economy.

But banks in Florida and many other states are fearful that property values will keep dropping and that more potential borrowers could soon lose their jobs.

As banks feel a continued need for caution, regulators are adhering to laws and regulations that require them to advise banks to cut back on certain types of loans.

“The regulators are in a lot of banks,” said Raul G. Valdes-Fauli, the Miami-Dade County president and CEO of CNL Bank .

That statement doesn’t mean that an official of the Federal Deposit Insurance Corp. or of another regulator is at a bank’s headquarters every day. It means that a regulator is advising banks on the types of loans they are making and the amounts they are adding to reserves.

For some banks whose losses and problem loans have been particularly large, regulators are giving orders rather than suggestions.

CNL, based in Orlando, and Stonegate have capital-to-asset ratios well above those needed to be well-capitalized and other strong financial measures, and thus does not have regulators “in the bank.”.

CNL is privately owned, with $1.2 billion in assets and three South Florida offices. The bank’s main focus is lending to businesses, including loans to purchase commercial properties.

For CNL, this year’s challenge in lending is “that nobody seems to know where the bottom will be” for the economy or for property values, Valdes-Fauli said.

“It is difficult to find bankable deals” where a borrower’s financial statement and current and projected cash flows meet require meet underwriting standards, he said.

“We are not pushing it, and I don’t think CNL is the only bank that is being prudent in the area of capital preservation,” Valdes-Fauli said.

At a June 16 seminar at the Doubletree Grand Hotel in Miami, sponsored by Condo Vultures® , Valdes-Fauli said: “I don’t think an alarm will go off some day and tell us the lending market has recovered.”

Instead, he expects the recovery will be gradual after banks see an apparent stabilization in real estate value, stronger employment numbers and stability in commercial vacancy rates.

Lending to businesses for operations and expansion and for purchase of commercial real estate are Stonegate’s main product lines.

Stonegate opened in 2005, with $40 million in start-up capital that remains a record among Broward County banks. The bank has $360 million in assets and its four offices are in South Florida.

Amid economic turmoil, Stonegate was profitable throughout 2008 and had net income of $232,000 for this year’s first quarter. 


“We have maintained diversity in our lending,” Seleski said of the bank’s ongoing profits. “We got out of real estate development in mid 2006.”

Stonegate’s development loans were to builders of town homes in South Florida, but not to builders of condominium buildings.

Loans to businesses for purchase and occupancy of commercial buildings and loans for purchase and refinance of commercial properties with multiple tenants are a major part of Stonegate’s business.

This year, the bank is looking more closely at the mix and financial health of tenants when it makes those loans, Seleski said.

Stonegate’s residential mortgages are mostly to what he calls “high-end individuals,” some of whom are commercial customers of the bank

The bank’s residential loans are mostly jumbos--larger than the $417,000 purchase limits of Fannie Mae and Freddie Mac.

Stonegate’s 2009 business has included loans to investment funds that bought multiple commercial properties in South Florida..

Some of those funds are interested in bulk deals to buy condo units. But they have not closed on any of those deals.

This year through June 11, there were 37 failures with three in Florida.

“They are still waiting for prices to drop more,” Seleski said, echoing a statement of many lenders and real estate brokers in South Florida.

Jim Freer is a special correspondent for CondoVultures.com. He is a veteran banking reporter and a consultant to the finance industry in South Florida.