Terremark woes not impacting Ocean Bank (Banco Plaza Ve), yet

From the March 7, 2003 print edition Jim Freer  

For more than a year, watchful eyes in the South Florida banking community have wondered whether the problems of Terremark Worldwide (Amex: TWW) could spill over on its primary lender, Ocean Bank.

Executives of Ocean Bank, the largest commercial bank based in South Florida, did not return phone calls this week.

But on Monday, the Federal Deposit Insurance Corp. released data that indicates an answer of "not as of Dec. 31."

That data is in Ocean Bank's year-end Call Report to the FDIC, the most-detailed information available on the privately held bank whose owners are based in Venezuela.

The report shows that Ocean Bank continues to have an alarmingly high number of nonperforming or problem loans, but that income from other loans has enabled the bank to continue to post solid profits.

Ocean Bank's major business is commercial real estate lending to clients including developers of offices and condominiums in South Florida.

The bank's commercial loan clients include Miami-based Terremark, owner/operator of the NAP of the Americas, the world's fifth tier-1 network access point.

The NAP is a high-speed electronic interchange where data is transferred from one major carrier to another. It occupies the second floor of the Technology Center of the Americas building under a 20-year lease. Its business has suffered in the telecom industry's meltdown.

Ocean Bank's 2002 net income was $45.5 million, for a 1.1 percent return on year-end assets of $4.1 billion. That gave the bank an ROA above the 1 percent that is the banking industry's standard for strong profits.

Ocean opened in December 1982 and has reported a profit for each of the 20 years it has been in business.

Seeds of a future income dip

But the FDIC's new report on Ocean Bank included some numbers that often indicate the prospect of a future drop in income for a bank.

The bank closed 2002 with $98.4 million in loans that are nonperforming – those that are 90 days more delinquent and those that no longer accrue interest.

Ocean Bank also had $1.1 million in real estate owned (REO) property. That's basically properties taken in foreclosure.

The $99.5 million total gave Ocean Bank a 2.4 percent ratio on nonperforming loans and REO to total assets.

The national average for banks and savings & loans was 0.9 percent on Dec. 31, according to the FDIC.

Ocean Bank's ratio was slightly higher than 1 percent for several quarters until the quarter ended June 30 – when it rose above 2 percent.

Of Ocean Bank's nonperforming loans at the end of last year, $97.7 million were in nonaccrual status. That category traditionally has the highest prospects for charge-offs or writedowns.

And a look at Ocean Bank's data, which includes a level of reserves that is strong by most standards, leads to questions about whether and when the bank might have to take a hit on problem loans and about how such a step could impact its balance sheet.

Linda Townsend, senior regulator for South Florida for the state government agency that is the primary regulator of Ocean Bank, said she and her staff are monitoring the bank, but not to any greater extent than they watch other banks with large amounts of nonperforming loans.

"Ocean Bank has shown a history of being very prudent in adding to its reserves and, when necessary in charging off loans," said Townsend, bureau chief for South Florida in the Florida Department of Financial Services' Bureau of Financial Institutions.

Townsend said Ocean Bank is among South Florida banks whose problem loans have grown due to the economic slump that is impacting real estate markets and due to problems in Latin America that are impacting many businesses in South Florida.

"There are indications that they [Ocean Bank] are managing it well," she said.

Townsend said her agency is not permitted to identify any nonperforming loans at Ocean Bank or other banks.

Ocean Bank's Call Report shows that during 2002 it added $47 million to its reserves for potential loan losses.

Reserve ratio draws attention

The bank had $84.9 million in reserves at year-end for a ratio of 90 percent to its nonperforming loans.

That ratio is high, considering that many banks whose problem loans have been growing have reserve ratios in the 50 percent to 60 percent range.

Townsend said she cannot comment on reserve ratios of particular banks.

"Speaking generally, you would be concerned about a bank even with a high percentage of reserves if a lot of the nonperformers are in auto loans," she said.

In Ocean Bank's case, she said, the portfolio is heavily laden with real estate, which regulators generally regard as strong collateral.

Research, including a review of Ocean Bank's Web site, shows no instances in which the bank has publicly identified borrowers for any of its loans in non-performing status.

But bankers and other business people are monitoring Ocean Bank's loans to Terremark, which operates at the Technology Center with the NAP.

In a filing with the SEC on Feb. 14, Terremark said it is negotiating a restructuring of its

$44 million in debt owed to Ocean Bank.

Terremark said it owes $1 million in unpaid interest on that credit.

In the filing, Terremark said it had obtained a letter from Ocean Bank waiving any current default under its credit agreement resulting from past due interest or from $22.6 million in liens that creditors have on the TECOTA building.

The waiver from Ocean Bank is through March 31.

That deadline is raising questions about whether and when the bank might take charges on its Terremark loan or on other problem loans.

Townsend said her agency has no indications that any such actions are pending.

Ocean Bank's Call Report for Dec. 31 shows $50.1 million in commercial and industrial loans that are in nonaccrual status and

$29.3 million in construction and land development loans in that status.

Precursor to a writedown?

If a bank charges off or writes down a large total of nonaccrual loans, it subtracts the amount from its loan reserves.

In quarters when a bank takes such action, it usually adds money to those reserves – often under orders from regulators.

Money a bank adds to reserves is reported as an expense, which reduces a quarter's income and in some cases can lead to a quarterly loss.

Ken Thomas, a Miami banking consultant, said he does not know which of Ocean Bank's loans are in nonaccrual status.

But he said that when large real estate loans are written down, a bank usually gains recovery on a large amount within several quarters, often through sales of property.

Thus, he said, Ocean Bank's current level of reserves might enable it to cover a large share of any writedowns.

Thomas said he feels that Ocean Bank has "strong management, and a good track record including managing of their portfolio."

At the end of last year, Ocean Bank had $327 million in Tier I capital, a figure similar to equity. Its ratio of that capital to assets was 7.92 percent – almost twice what regulators require for adequate capitalization.

But Ocean Bank's nonperforming loans are a main reason the bank is rated only in the high "adequate" range by Bauer Financial of Coral Gables.

For the quarter ended Sept. 30, Ocean Bank has a three-star rating from Bauer Financial, which rates banks on a one to five scale, with five being the highest, based on factors that include profitability, capital and loan delinquencies.

E-mail contributing writer Jim Freer at jimfreer@aol.com.