Most South Florida banks have increased the spread between interest income and interest expense this year, but tougher competition for creditworthy borrowers has kept their interest margins smaller than many banks would prefer.
“There is undeniably more competition, particularly in the C&I [commercial and industrial] space,” BankUnited chairman, president and CEO John Kanas said on the bank’s recent third-quarter conference call with stock analysts. “We’ve backed away from some deals in this quarter that we just wouldn’t do at the price or the terms that other people would do them at.”
But BankUnited also pays interest rates below 1 percent on certificates of deposit, 0.8 percent for a 36-month CD, for example. The cost of deposits at the Miami Lakes-based bank dropped to 0.78 percent in the third quarter from 0.84 percent in the second quarter and 1.07 percent in last year’s third quarter.
That helped BankUnited fatten its spread, or net interest margin, to 5.95 percent during the first nine months of the year, the best among the 67 banks based in Miami-Dade, Broward and Palm Beach counties. The comparable number last year was 5.82 percent. Net interest margin, roughly comparable to a retail profit margin, is interest income minus interest expense, divided by assets.
The DBR survey shows that 47 of the 67 banks were profitable in the January-September period, including 32 that increased their net interest margins in the nine-month period, compared with the same period last year.
Less fortunate banks, particularly smaller ones, face “the burden of collapsing margins and regulatory pressure,” Kanas said on BankUnited’s Oct. 25 conference call. Loose monetary policy “threatens to pour more liquidity into the system and drive rates down further, which will have a further negative impact on banks.”
If a growing number of money-losing banks manage to turn the corner to profitability, a sustained period of low-cost and no-cost deposits may help pave the way.
The DBR survey found that while the 67 lenders’ combined deposits increased by about $1 billion to $49 billion during the first nine months of the year, their combined interest expense fell to $321 million from $372 million in the same period last year.
The survey shows that the average net interest margin among South Florida banks during the January-September period was 3.57 percent, up slightly from 3.53 percent last year. But banks tend to aim higher than that, to ensure that interest income covers not only interest expense but also a big portion of such non-interest expenses as salaries and office rent.
“Usually, you need a 4 to 5 percent spread to cover expenses, so you can net 1 percent,” said Ken Thomas, an independent bank consultant in Miami. But for many banks, “it’s not possible anymore. … They just can’t make a decent spread anymore. Look what they’re getting on mortgages, in the 3s.”
The 67-bank survey shows that 13 of the banks achieved net interest margins of 4 percent or better from January through September, up slightly from 11 that did so last year.
A general rise in interest rates could alleviate some of the pressure on profit margins in lending, but banks face a prolonged period of low rates, Thomas said, because Federal Reserve chairman Ben Bernanke “is going to keep them low until 2015.”
Thomas said some banks have responded to pressure on net interest margins by acquiring businesses in such fields as insurance and wealth management that generate non-interest income.
“It’s common in the Northeast, though we have not seen it down here” in South Florida, he said. But “that’s very dangerous unless you know something about these other fields.”
After BankUnited, the South Florida banks with the highest net interest margins during the first nine months of the year were 1st United Bank in Boca Raton (5.1 percent), Capital Bank in Miami (4.63 percent), American National Bank in Oakland Park (4.56 percent), and Palm Beach Community Bank (4.35 percent).
Cheap deposits and solid loan growth through September boosted 1st United Bank’s net interest margin 38 basis points higher than its net interest margin of 4.72 percent last year, and restrained interest expense has been a big factor because, like many other profitable banks, 1st United has a large base of non-interest bearing deposits.
“Our margin continues to remain strong and is driven by our core deposits and low cost of funds. We currently have approximately 31 percent of our total deposits comprised of non-interest bearing accounts,” Rudy E. Schupp, chief executive officer of 1st United, said in a company statement summarizing third-quarter results. In addition, “we have and continue to see increased loan production in each of the markets we are serving.”
The area banks with the five lowest net interest margins in the January-September period were OptimumBank in Plantation (1.9 percent), Intercontinental Bank in West Miami (2.09 percent), Great Florida Bank in Miami (2.32 percent), EuroBank in Coral Gables, which has been renamed Banco do Brasil Americas (2.38 percent), and Mercantil Commercebank in Coral Gables (2.43 percent).
Some low-margin banks could improve as they resolve troubled loans and originate fresh ones. Money-losing OptimumBank, for example, could be poised for a return to profitability.
“There are a number of transactions in process that will likely further reduce non-performing assets over the next several months as well as raise our net interest margin,” OptimumBank chairman Moishe Gubin said in a Nov. 1 statement to announce third-quarter results. “The current loan origination pipeline has grown to over $16 million, and we anticipate returning to profitability in 2013.”