Michigan banking companies are not so bullish on their home state these days.
The $15.5 billion-asset Flagstar Bancorp Inc. in Troy has significantly scaled back its branch expansion plans in Michigan, and the $58 billion-asset Comerica Inc. in Detroit told American Banker last week that of the 30 branches it plans to open this year two would be in its headquarters state. (See
Their decisions are based largely on demographics. Michigan has lost more than 300,000 jobs in the past five years mostly in manufacturing and has ranked among the states with the highest unemployment rates for four years running.
The news isn't getting better. DaimlerChrylser said Wednesday it would eliminate a shift at its 3,300-employee Warren truck factory, and University of Michigan economists estimate that the state will lose 6,000 more jobs and 3,650 residents as a result of Pfizer's announcement in January that it will close three Michigan research facilities.
Banks are clearly feeling the effects. Though few are losing money, loan growth has been slow, profitability ratios of Michigan-based banks are well below the national average, and credit quality is suffering.
In a press release announcing his company's fourth-quarter earnings last month, Chemical Financial Corp.'s chairman, president, and chief executive, David B. Ramaker, appeared to be speaking for many of the state's bankers when he said, "The quarter's financial performance continued to be impacted by a flat yield curve, a struggling state economy, and fierce deposit pricing competition."
Chemical, a $3.8 billion-asset banking company in Midland, reported that its fourth-quarter diluted earnings per share fell 10%, to 45 cents. Its provision for loan losses doubled, to $2.6 million, from a year earlier.
The chairman-elect of the Michigan Bankers Association has some ideas, however, for getting the economy back on track.
Dennis P. Angner, who is also the president and CEO of the $771 million-asset IBT Bancorp Inc., of Mount Pleasant, Mich., said the state Legislature should simplify the tax structure to make Michigan more attractive to business. He also said bankers need to start thinking about small businesses, not big factories, as economic engines.
"The key is going to be small-business formations," Mr. Angner said. "Banks have got to be willing to assume some risk and lend to smaller segments. The days of 10,000-job factories opening in Michigan are over."
The fourth quarter was challenging for banks nationwide, of course, but Richard M. Gilloffo, the Chicago regional manager for the Federal Deposit Insurance Corp.'s insurance and research division, said it was particularly tough on Michigan banks.
"Their net interest margins are being squeezed, and delinquencies are on the rise in certain areas," he said.
The $3.4 billion-asset Independent Bank Corp. in Ionia, for example, reported that earnings from continuing operations fell 91%, to 4 cents per diluted share, due in large part to a 138% increase in nonperforming loans, mostly commercial and construction and development credits.
The slowdown in home building and a decline in home prices are persistent sources of concern for the state's banks, said Robert N. Shuster, Independent's chief financial officer. "Prices have come off a bit, but more than that, the level of inventory compared to buyers" is at a high, "and that has really taken its toll," he said.
Nationwide, home prices were 7.73% higher in the third quarter of 2006 than a year earlier. But in Michigan the average price fell 0.6% during this period, and some areas saw declines of up to 3%, according to the most recent data available from the Office of Federal Housing Enterprise Oversight. In fact, Michigan is the first state to show a year-over-year decline in home prices in more than six years.
At Flagstar, fourth-quarter earnings plunged 69%, to 11 cents per diluted share, largely due to an $8.7 million charge for a fidelity bond coverage dispute.
Fourth-quarter earnings were also hurt somewhat by a rise in home loan delinquencies in Michigan, which Flagstar's president and chief executive officer, Mark T. Hammond, said were about twice the average for its operations nationwide. (About 13% of its loan portfolio is in Michigan.)
The poor loan prospects in Michigan partly explain why Flagstar recently adjusted its branch expansion plan. A couple of years ago, Flagstar had expected to build 25 branches in 2007. It revised that number to 17 last year and now plans to open 13 seven in the Atlanta area and six in Michigan. Most of the branch plans put on hold were in Michigan, Mr. Hammond said.
"We're pretty bullish about our prospects and about the overall marketplace," he said. "We aren't as optimistic about the Michigan part of our business."
Comerica, the state's largest banking company, reported significant loan growth last year in all its markets except the Midwest. It said last month that, excluding financial services division loans, lending grew 15% in the western market, 19% in Texas, 25% in Florida, but just 1% in its other markets primarily Michigan. Chairman and chief executive Ralph W. Babb Jr. said last month that credit quality was "solid" in its Texas and California operations last quarter but had deteriorated slightly in Michigan.
Last year was particularly challenging for the $220 million-asset Clarkston Financial Corp. in Clarkston. It said this week that nonperforming loans had increased 33% last year, to nearly $3.3 million, and that 2.1% of its total loans were nonperforming.
Still, its president did not blame the company's woes on the economy or competition.
"We offer no excuses for the poor performance we have experienced over the past year," said J. Grant Smith, its president and chief operating officer. The company has "vigorously addressed" its asset-quality problem, he said, by hiring consultants to review credits of more than $250,000, hiring a new senior lender at its Clarkston State Bank subsidiary, replacing the president of its Huron State Bank, and moving credit oversight from the bank to the corporate level.
