States Profile Hasnt Still Dim

October 7, 2005
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GRAND RAPIDS — The Federal Deposit Insurance Corp.’s Fall 2005 profile for Michigan shows a state still grappling with weak employment and slow population growth.

Michigan was the only state in the nation reporting year-over-year job losses in the second quarter.

The Grand Rapids-Wyoming and Kalamazoo-Portage areas, however, added a collective 1,400 jobs to non-farm payrolls and were the only metro areas in the state to post job growth in the second quarter.

Michigan has been losing population since 2002, said David Van Vickle, Division of Research regional manager for the FDIC Chicago Region. The net out-migration has been a continuing issue.

“Clearly, the ability to generate jobs is part of that,” he said. “A lot of people perhaps working in manufacturing jobs may be going south to keep those jobs. The job situation doesn’t support stronger demographics.”

Manufacturing job losses continue to be the biggest drag on Michigan’s economy, due in part to cutbacks in the auto industry, according to the report. The construction, trade and finance sectors have slowed hiring. The FDIC saw job growth only the “lower paying” job sectors, such as hospitality, government, educational and health services.

Michigan residents immediately felt Hurricane Katrina’s impact as higher gas prices squeezed their pocketbooks. If energy prices remain high, the FDIC predicts, some energy-dependent manufactur’s — particularly auto producers and suppliers — may experience narrower profit margins. The squeeze will extend to farmers, who could see higher harvest and shipping costs. Consumers, too, may have to curb their spending and travel habits.

On the upside, industries related to building materials, construction and furniture will likely see increased demand for their products as rebuilding efforts get underway in the Gulf Coast area.

The sluggish economy has also dampened residential and commercial office markets, according to the federal agency. Homes price appreciation in Michigan has been below the national level for the past five years. What has prevented homeowners from achieving greater price gain, the FDIC notes, has been the combination of weak employment, slow population growth and steady housing starts. 

The employment problem continues to burden Michigan households. Once again, Michigan per-capita personal income growth ranked among the lowest in the nation, with year-over-year growth of 3.3 percent in the second quarter, compared to 5.5 percent nationwide.

Bankruptcies and foreclosures remain higher than national levels. The volume of loans in foreclosure was 1.6 percent in the first quarter of the year, compared to a national level of 1.1 percent, the FDIC pointed out.

Michigan’s community financial institutions saw a slight increase in return on assets compared to the year before, which the agency attributes to a significant increase in net interest income.

Loan asset ratio reached 77.5 percent in the second quarter, which was among the highest in the nation. The majority of growth came from higher yielding construction and nonresidential real estate lending, according to the FDIC. Most major loan categories posted declines in past-due rates, with small to moderate increases in home equity, construction and multi-family real estate loans.

Commercial real estate (CRE) lending is an increasingly important activity for Michigan’s community banks as borne out by the data: From June 30, 2000, to June 30, 2005, median CRE loans to total assets increased from 14 percent to 26 percent. The FDIC report indicates that a number of Michigan metro areas have shown increasing CRE concentrations among their banks. Detroit metro area has the most financial institutions of any metro area of the state, and community banks there “have embraced CRE lending,” the agency says.

“That’s an indication that the share of a bank’s total assets — the share of its total loan portfolio — is increasing in commercial real estate loans,” Van Vickle explained. “What we’re trying to emphasize with this information is that not only are banks in Michigan making an increasingly larger number of commercial real estate loans but the concentrations of those loans in relation to their capital are growing very rapidly.”

It’s an area the FDIC wants to keep an eye on, he said, because historically CRE loans have been more volatile. For example, 15 years ago the nation had very high past due rates in CRE loans — 5.7 percent vs. 1.7 percent now. Van Vickle noted that when things happen in the commercial real estate market they tend to happen very quickly, vs. mortgage lending and consuming lending that don’t see that kind of range in past due rates.

For all banks in the country, the median concentration of CRE loans is 182 percent. In Michigan it’s 259 percent, and in Detroit it’s 432 percent. More than 65 percent of banks in the Detroit area have those high concentrations, Van Vickle said.    

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