Banks in flux

May 13, 2011
| By Pete Daly |
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The economy over the last three years was hard enough on community banks. Now here comes the Dodd-Frank Wall Street Reform and Consumer Protection Act, the impact of which may soon be enough to trigger more major changes among the “who’s who” of smaller banks in Michigan.

Actually, the 848-page bill was passed July 21 last year, but according to a report in The Wall Street Journal, as of the first of May, about 62 percent of the 387 sets of rules required by Dodd-Frank had not even been proposed yet. Arriving at those rules, which will eventually amount to an overhaul of the financial regulatory system, has already generated more than 3,500 additional pages to the Federal Register.

The government’s bank regulators who are writing the regulations are under pressure to get the job done.

“It’s going to be a huge deal,” said Jon Chism of Plante & Moran in Grand Rapids. An audit partner at the accounting firm, he has specialized in working with banks for about 40 years.

“The way the politicians describe it, this is really focused on Wall Street — really big banks. So it shouldn’t be a problem for our community banks,” said Chism. “But our community banks, as they analyze it, see that it creates new requirements for them, new challenges for them, and of course, a lot more cost for them.”

Chism predicts that some regulations specifically addressed to big bank issues will be so popular with the regulators that they will insist that all banks be required to prove compliance.

The weak economy over the last three or four years has included many bankruptcies and a decline in property values that have “really run down the capital of the banks,” said Chism. Banks are required by law to maintain a minimum level of capital reserves; some are hovering near the required minimum while others are below it. Many community banks are under pressure, he said, “to make money, to clean up their portfolio and get more capital.”

The general public is under financial pressure as well, with oil and other commodities prices heading up.

“Everybody is fighting for every nickel,” he said, and now it is likely that some community banks that survived the economic crisis will wonder how to meet the challenge of increased compliance costs, as a result of Dodd-Frank.

Some banks will do that by merging with others to spread their operating costs over a wider platform, according to Chism. Two or three banks can eliminate “a significant amount of cost by combining,” he said. Instead of two or three CEOs, only one is needed, as would be only one CFO, one chief lending officer, one chief operating officer, etc.

“You can lop off some big costs,” he said.

Some banks, however, are going in the opposite direction: trying to shrink in size to meet that minimum capital reserves ratio, according to Chism. A Michigan bank that has been doing that is Capitol Bancorp in Lansing, which Chism said is “way under-capitalized.” Capitol had ownership in banks all over the country, but Chism said he has read that, while it once had interests in more than 50 banks, that number had dropped to about 22.

In March and April, Capitol announced divestitures or planned divestitures in three banks: two in Texas and one in North Carolina.

“They’re having to shrink,” said Chism. “I think there’s some bargain buys (in banks) out there and will be, because capital is hard to come by, particularly on the smaller banks.”

Chism said there is a perception that investors view Michigan with great caution because of the decade of job losses in the state’s manufacturing sector.

The smaller banks have an even harder time raising capital because investors are mainly interested in banks with assets of at least $1 billion and up, according to Chism. Michigan, in particular, is “a buying opportunity for somebody who has access to capital,” he added.

One such person is Wilbur Ross of W.L. Ross & Co., who has acquired three failed banks in Michigan since early 2010, according to American Banker. Ross is a billionaire investor who targets distressed businesses ranging from coal to banks, and he is “the bargain buyer right now,” according to Chism.

A Michigan bank with capital to invest in other banks is Chemical Bank of Midland, which Chism described as a strong bank. Last summer, Chemical Bank acquired the holding company that owned Byron Bank in Byron Center.

More recently, First National Bank of America in East Lansing moved into the Grand Rapids market with its acquisition of a First Financial Bancorp bank in Grandville. That branch had been part of Irwin Union and was failing when it was briefly closed by government bank regulators in 2009 and then reopened by First Financial, a Cincinnati-based bank holding company.

A West Michigan bank that continues to struggle is Independent Bank in Ionia, which on May 2 reported a net loss of $8.4 million in the first quarter of 2011. Independent Bank Corp. said the loss was primarily due to declines in the provision for loan losses and in non-interest expenses that were offset by a decline in net interest income.

Independent Bank CEO Michael W. Magee said the first quarter results reflect “further progress in improving asset quality, as evidenced by a reduction in our non-performing loans, loan net charge charge-offs and the provision for loan losses as compared to” the first quarter last year.

In 2010, Independent Bank lost almost $21 million, slightly more than $4 per share, compared to a loss of almost $95 million, almost $40 per share, in 2009.

Independent Bank was founded as First National Bank of Ionia in 1864, and now has about $2.5 billion in assets and about 100 offices throughout the Lower Peninsula.

Macatawa Bank in Holland also has been struggling and is now going ahead with a public offering of up to 17.8 million shares of common stock to raise capital. It also is making a rights offering to its current shareholders of one nontransferable subscription right for each share already owned, at a price of $2.30 a share. In late April, Macatawa chairman Richard Postma loaned the bank $1 million to fund operating expenses.

Chism said Macatawa has more than $1 billion in assets, which will likely improve its chances to raise capital. The chairman’s loan also “gets everybody’s attention.”

Independent Bank had also made a stock offering last year to raise capital, but Chism said he was not aware if it was successful. Macatawa Bank, he said, has a better chance because it has “actually been making some money on a quarterly basis now.”

Bank stocks now are not very popular among investors and lots of bank stocks are selling below book value, said Chism. He said it seems like if the word “bank” is “in the name of your company, you’re being discounted,” he said. Banks have received bad PR because of the recent crisis on Wall Street, said Chism, which he said is unfair to West Michigan’s community banks.

“We have some community banks that have held their own in a very tough economy, which tells you they are pretty good banks.”

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