From beat up to upbeat

May 20, 2012
| By Pete Daly |
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Rob Bondy is a professional observer at annual meetings of community banks in West Michigan, and he reports the mood this spring is very upbeat: People are borrowing money again, and the banks are "able to turn away from what the story has been for the last few years, which is managing their problem loans."

Bondy, a senior manager in the financial institutions group at the Plante & Moran accounting and consulting firm, said most of his firm's client banks and the community banks in Michigan, in general, are reporting a profitable 2011 and continuing to be profitable in their first quarter.

There are about 100 community banks in Michigan's Lower Peninsula, by his estimation. Some of the larger ones in West Michigan are Mercantile, Macatawa and Independent, but others can be quite small and fairly new, such as Grand River Bank.

Interest rates are extremely low — the Wall Street Journal prime rate last week was 3.25 percent — so much so that community banks "are starting to see their core engines fire back up," according to Bondy. Money is cheap for the banks to borrow and then loan out to consumers, who are beginning to spend more freely as the Great Recession seems to continue to recede.

"All the banks in town are saying, 'We've got money to lend. We're ready to lend,'" he added.

"Mortgage" is the magic word at community banks these days, according to Bondy. He said the best deals for the banks would involve businesses borrowing to expand or start up, but business is still proceeding cautiously.

The manufacturing and construction sectors are making good money now, he said, rebuilding their capital. And they are "ready to start making investments again." However, he added that businesses are "not done yet filling in the hole created through the recession. They are recapitalizing, but all are cautious about the next project if it requires them to leverage up" by borrowing, said Bondy.

Mortgage lending is where the action is today for community banks, said Bondy, and he has been hearing that mortgage mantra repeated at the annual meetings. He said community banks originate mortgage loans and often end up selling those loans, the big buyers being the two giant U.S. government-sponsored entities Fannie Mae and Freddie Mac. But the mortgages are also of growing interest to some private equity investors, who are looking for "conforming loans" — those made to low-risk individuals with high credit rating scores and who obviously have the ability to repay what they borrow.

A few years ago, banks selling mortgage loans typically received a premium of 1.5 percent, but, he said, those premiums are nearly double that today, and there is a "tremendous appetite" among buyers of those mortgages, all driven by low mortgage rates, according to Bondy.

Bondy said the "vast majority" of the new mortgages being made today are actually refinancing of existing mortgages.

"The managers of these banks recognize that it's a unique time," he said, because interest rates are so low and because real estate values appear to have stabilized, adding fuel to the mortgage market.

Bank executives "don't expect this to be something that continues at these levels for a long period of time. Most of the annual meetings we went to and most of the first-quarter press releases you read, they comment on the strong mortgage banking activities," said Bondy.

"They'd love for it to continue," he added, but explained it is obvious there will be a point where all the homeowners who are going to refinance will have done so.

At the same time, the banks' problem loan portfolios are beginning to shrink. The amount of problem loans is still high, said Bondy, compared to the long-term average, but the ratio of loans that are delinquent 30 and 60 days is dropping and, in fact, "really low. Those are back to pre-recession levels.

"We're passing it," he said, referring to the travails of the banks the last few years. "The problem loans are getting worked out," and banks are OK now with marking down their property values to fair market numbers, which is helping the real estate market get moving again.

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