We recently traveled to Florida to meet with a group of mid-cap banks. Of the 12 banks that participated on the trip, 9 are headquartered in Florida (2 Arkansas, 1 from New Jersey), and 10 are publicly-traded[1]. Of the publicly-traded banks, the median asset size is US$5.0 billion, the median market cap is US$841 million (US$1.5 billion average), and the median expected loan growth in 2016 is 27%[2]. On the trip, we also had the opportunity to meet with a real estate expert who has been investing in the Florida market for over 30 years.

Summary Facts about Florida

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Favourable Tax Environment Driving Net Migration
Florida has a population of ~20 million, now the 3rd highest in the U.S., and a nominal GDP of over US$800 billion[3], ranking it 17th in global economic output if it was a country[4] . Large net migration into the state (ranked number one in the U.S.[5]) can be attributed to Florida’s low tax rates, for both businesses and individuals, and other pro-business attributes. Florida has no personal income tax, a corporate income tax of only 5.5%, and private sector union membership of only 2.5%, which is lower than that of Texas. As one executive on the trip told us, the state “used to go dark for half of the year” when the winter migraters left Florida as the weather turned warmer, but this is no longer the case.

Not Just Disney and Orange Juice
Although popularly known for tourism (~100 million visitors in 2015[6]) and citrus exports, Florida’s economy is much more diverse. The state is home to 17 Fortune 500 companies, including Raymond James, NextEra Energy, Publix Super Markets, World Fuel Services, and Office Depot[7]. Florida manufactures the 2nd most space and defense systems in the country[8], and the Miami area has a rapidly growing tech and venture capital industry. The unemployment rate in Florida is a very low 4.7%, below the national average at 4.9%, and much lower than the state’s 11.2% rate from early 2010 (~10% nationally at that time). This large swing in employment is indicative of the “boom and bust” nature of Florida’s economy.

Boom and Bust Real Estate Market
Coincident with the large swings in employment is the nature of the real estate market in Florida, which suffered more than many other states in the recent recession. Home prices declined by 22% in December 2008 (year-over-year), far worse than the national average decline of 7% over the same period[9]. Since September 2012, annual house price growth in Florida has surpassed that of the U.S., most recently growing at 9.8% while nationally prices rose by 5.4%[10]. Banks in Florida are particularly sensitive to real estate prices given their outsized exposure to this loan category.

Key Takeaways from the Trip

CRE Scrutiny on the Rise
There has been an increased focus on banks’ commercial real estate (CRE) exposure over the past year. Multiple executives in Florida told us that they have analyzed what happened in their local markets leading up to and during the credit crisis, and have since put policies in place to mitigate the impact of future downturns (e.g. lower LTVs). One executive told us that he is bearish on hotels and condos in Miami and believes the market is “too hot”, with another stating outright that they are not financing any new condo construction in the city. The real estate expert on the trip told us that foreign money is “drying up”, and he expects real estate prices in Southeast Florida to “adjust” (i.e. fall slightly) in the next 12-24 months. He did note that there is more disciplined lending now than there was pre-crisis, which should alleviate the severity of a potential correction.

Regulators’ real estate loan thresholds for additional scrutiny and caution are as follows: CRE loans which amount to 300% or more of risk-based capital, construction loans which amount to 100% or more of risk-based capital, and growth in CRE loans of more than 50% over a three-year period. What exactly happens when a bank breaches one or more of these thresholds is unclear, as the Federal Reserve has stated that these do not constitute limits nor would they constitute a “safe harbor” if an institution is under these levels.

Most meeting participants, including those operating above the thresholds, told us that regulators were accepting of their banks’ CRE concentrations and lending activities. One tour participant told us that regulators are more focused on the concentration within those categories (e.g. is 90% of your CRE cash flow coming from hotels in Miami?), not on the absolute level of CRE as a broad category. Other bank executives explicitly stated that they will not breach the regulatory capital levels, with some more focused commercial and industrial (C&I) lending in order to diversify away from CRE.

Competition Leading to Riskier Lending, but Executives Not Expecting Severe Fallout
The CEO of BankUnited (based in Florida), who did not participate on the tour, recently stated “A lot of our bank competitors are offering lending terms that we think are quite liberal”[11]. This sentiment was echoed by trip participants who spoke of how increased competition is in some cases leading to a “loosening of covenants”. Bank executives said they are seeing competitors enter deals with cap rates that are “way too low”, while others are stretching on the duration of fixed-rate deals, with some priced at a 3.25% fixed-rate for 20 years. Despite these concerns, one meeting participant stated that he is not seeing the issues right now that would lead him to believe that a downturn is imminent. This view was reiterated by another executive who proclaimed that, “…this is not ‘06/‘07…we are not seeing the excessiveness that we saw during that period.”

Where are the Deals?
There are currently 141 commercial banks headquartered in Florida, down from 197 four years ago[12], with 37 of those holding over $500 million in assets[13]. Given the large number of banks in the state and their spread dependent nature (currently suffering due to the low-rate environment), Florida’s market is well-positioned for M&A activity. Although there were expectations for significant consolidation this year, there have only been three announced deals so far in 2016 (20 in 2015), which one executive attributed to negative shareholder response to other acquisitions (e.g. FNB/YDKN). One tour participant estimated that the yield environment, combined with a lack of fee income, will push 30 to 40 banks to sell themselves within the next 3 to 4 years.

Florida bank executives were notably explicit in their intentions to be involved in M&A. Multiple meeting participants told us that “everyone is for sale”, and stated that they are receiving numerous inbound calls to gauge their interest in buying competitors (e.g. “more calls now than at any point over the last 3-4 years”). Executives are hesitant to pay over 2x tangible book value (one bank Chairman told us that this price is a “line in the sand” for him), as they are concerned that if that price is breached in a transaction, every other bank CEO will want to be paid at least that much in sale process (“Our baby is prettier than that one”).

Credit quality is generally very strong amongst Florida banks, leading to some discussion about executives potentially “getting out” (i.e. selling their banks) before the cycle turns and valuations fall. There was some pushback on one bank for its plans to go over the US$10 billion threshold before putting itself up for sale, which was viewed by some investors as a change in stated strategy.


[1] One bank’s common stock trades over-the-counter.
[2] Does not include metrics for the bank that only trades over-the-counter.
[3] Source: Federal Reserve Bank of St. Louis.
[4] Source: World Bank.
[5] Source: CenterState Bank of Florida.
[6] Source: Visit Florida.
[7] Source: Enterprise Florida, Forbes.
[8] Source: Enterprise Florida.
[9] Source: Federal Reserve Bank of Atlanta. FHFA House Price Index.
[10] Source: Federal Reserve Bank of Atlanta.
[11] Source: South Florida Business Journal.
[12] Source: Federal Reserve Bank of St. Louis. As at Q1 2016.
[13] Source: CenterState Bank of Florida.

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