Banks feel pinch from downstate economic woes

REGION – Federal statistics show troubled loans rising slightly in northern Michigan, sending a warning signal to local banks while setting them apart from poorer-performing institutions in the rest of Michigan.

In the Grand Traverse region, the problems are showing up in figures for delinquent and non-current debt, covering everything from real estate development loans to installment debt, and mortgages. But they are a fraction of the difficulties cropping up statewide. Bank examiners are reportedly devoting much of their effort to southeast Michigan where an auto industry meltdown seems to have been narrowly averted so far.

Figures from the Federal Deposit Insurance Corp. for six banks based in the Grand Traverse region and nearby areas showed that their non-current debts have risen significantly between December 2004 and March 2007.

As of the first quarter of this year, non-current debt for these institutions stood at nearly $8.6 million, up about 60 percent since December 2004 and about 9 percent since December 2005. That's out of current assets estimated at more than $1.5 billion. Non-current loans are defined as debts that are more than 90 days past due or are no longer accruing interest.

For purposes of compiling overall figures, the Traverse City Business News looked collectively at Traverse City State Bank, Northwestern Bank, the Bank of Northern Michigan, State Savings Bank of Frankfort, First Community Bank of Harbor Springs, and Honor State Bank. The FDIC does not break out regional figures for large banks' northern Michigan branches.

The performance of individual sectors has varied widely from bank to bank and from quarter to quarter.

"We are seeing very modest increases in the commercial area," said Richard Jackson, executive vice president at Northwestern Bank.

The real estate industry's current difficulties are behind some of the loan problems. Five out of the six banks had more trouble with real estate-secured loans over the last three years, according to the FDIC statistics.

"I think people are doing everything they can to keep it together, because the environment is really tough in development and construction," said Mark Eckhoff, president of Fifth Third Bank of Northern Michigan.

"If they developed something and it is unsold or unleased, and they are sitting on it, they are having a hard time right now."

According to FDIC figures and local bankers, northern Michigan's banks are well capitalized to withstand the pressure and can even be quite profitable, as the balance sheets of Northwestern Bank in Traverse City and State Savings Bank of Frankfort attest.

That pair beats out most of their peers across the country in the profitability category, delivering returns that were more than 50 percent higher than banks similar to them nationwide, all other things being equal.

But with the exception of Honor State Bank, all six banks saw their total quarterly income erode slightly between March of this year and last year. Honor's income rose about 2.7 percent, to $398,000 for the quarter, compared to the same period a year earlier.

While the trend seems clear, bankers say that snapshots of the non-current loans can be tricky to interpret. Just a single manufacturer or contractor catching up on its payments on a $300,000 loan could cut a bank's non-current debt in half or even eliminate it entirely.

Art Jeannot, president of Honor State Bank, said he has seen a rise in delinquencies in the real estate and in other commercial lending. A loan is declared delinquent when a payment is more than 30 days past due. Bankers consider that kind of breach less serious than a debt that is more than 90 days past due or is not accruing interest.

Jeannot said Honor's status as a community bank gives it greater flexibility in dealing with troubled loans. "Our delinquencies are typically in the 30- to 59-day bucket, which means they can be cured fairly easily."

"Because we know our customers intimately, in some cases our losses and foreclosures may be less because we are going to limp along with these folks," helping them work out problems, he said.

That contrast with the rest of the state of Michigan is sharpest of all. The innate conservatism of northern Michigan banks has apparently worked to their advantage. While figures vary significantly from quarter to quarter, northern Michigan's troubled loan figures aren't even half Michigan's average.

"The observation that northern Michigan banks are doing better than other banks around the country is right on," Jackson said. "You will find that banks here are a little more prudent in their underwriting and in their lending standards, and that is paying off in aces right now."

According to the Federal Deposit Insurance Corp., about 2.7 percent of all loans by Michigan-based banks are past due, not generating interest or are insufficiently collateralized. This quarter, the figures for northern Michigan banks are mostly under one percent. The corresponding rate is about 1.6 percent for Illinois and one percent for North Carolina.

Michigan banks remain healthy in no small measure due to overall sound lending practices and federal regulation, according to the Michigan Bankers Association. But profitability is suffering.

While all types of nonperforming loans are affecting bank profitability, home mortgage defaults are a major culprit. Automakers, their suppliers and other industrial companies are being stressed as well, said Richard A. Brown, chief economist with the Federal Deposit Insurance Corp. in New York.

"With the bankruptcies you see in those sectors, there's no question that there are some problem loans there," Brown said. "The standard measure of profitability is the return on assets. If you look to the median for Michigan for the first quarter of 2007, it was 0.86 percent," he said. "Historically, that's not a terrible number. That's still earning money on average. But it's down from 1.02 in 2005, and 0.95 in 2006, so you see the trend is not heading in the right direction."

He puts the national average at more than one percent.

But Eckhoff of Fifth Third Bank believes well-run companies can weather the storm.

"It was the folks who were on the bubble when the economy was good, two or three years ago who are really having a tough time now.

"Regardless of what industry they are in, there are people who have done well in the past and have been good operators," he said. "They are the ones that are doing okay."

While Jackson of Northwestern Bank sees the institution's own home mortgage business holding up, the situation is different for the Fannie Mae and other second-tier debt that the Traverse City bank services for other institutions, he said.

"I attribute that to some of the new programs has put out there, either that might be interest-only or a very high loan-to-value program," he said. "Automated underwriting programs have also been quite generous in approving some of these credits."

Bankers across the board also point to the strengths of the region's economy, especially in agriculture and the wine industry this year.

"It's not all doom and gloom," said Bruce Reavely, community president for Huntington Banks in Traverse City.

"It would not be truthful to say that some of our commercial customers are not feeling the impact of the Michigan economy. But we have not experienced an increase in delinquencies that we would regard out of normal tolerance."

One source of the stability is the size of Huntington Banks' coverage area. It extends from Manistee to Sault Ste. Marie. Reavely has found less impact from southeast Michigan and the auto industry in the Upper Peninsula.

He recently met with people in the building trades there.

"It's clear that people are adding on onto their homes, building new homes, and contractors are putting up affordable housing. The guys who run those businesses have waiting lists." BN