FDIC States Recovery Is Weak

October 11, 2004
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GRAND RAPIDS — The Federal Deposit Insurance Corp.’s analysis of Michigan’s economic and banking trends doesn’t paint an especially pretty picture, but it’s not all bad.

Job losses have occurred across most business sectors in Michigan, with some of the worst declines in the Saginaw-Bay City-Midland and Lansing-East Lansing areas, according to the just released FDIC state profile.

The state’s auto and supplier sector continues to be critical to the state’s economy and auto industry trends are vital to Detroit. Movement of jobs offshore is no longer just a blue-collar issue, the FDIC maintains. “As the Big Three automakers and related companies continue to strive for efficiencies, more white-collar positions may be at risk,” the analysis stated.

Furthermore, Detroit’s office vacancy rate is the highest of any city in the Chicago Region, which includes Michigan, Illinois, Indiana, Kentucky, Ohio and Wisconsin. The city’s downtown and suburban office vacancy rates were 24.7 and 20.4 percent, respectively, in the second quarter.

The health of Detroit’s small retail, office and other commercial properties is vital to community banks because 68 percent of their non-farm, nonresidential loans are to small businesses for amounts less than $1 million, according to FDIC.

The state’s commercial real estate exposure is much higher than the rest of the Chicago Region and it’s increasing, the analysis showed. The Grand Rapids and Detroit MSAs, in fact, are about even in their exposure. Ann Arbor also is among the top three markets for exposure.

However, the report points to the Grand Rapids-Muskegon-Holland area as “one bright spot” on the economic scene due to positive year-over-year job growth after roughly three years of job losses. That job growth has come amid some signs of improvement in the furniture industry and labor force growth, the FDIC says.

There’s also good news for Grand Rapids financial institutions: “The improving economy in the Grand Rapids area is a good sign for local insured institutions, which have a median concentration of commercial real estate (CRE) loans to Tier 1 capital of 425 percent.

“This exposure level is among the three dozen highest in metropolitan areas nationwide. Rising interest rates may particularly affect CRE credits as collateral values can decline because of higher capitalization rates, and debt service coverage can decline because of increasing debt payments.”

In Michigan, community bank profitability has been relatively strong over the past several years, despite economic weakness. The median return on assets, according to FDIC data, held fairly steady between 1.12 and 1.18 percent from 1999 through 2003.

But in this year’s second quarter, net interest margins fell below 4 percent and ROA was well below 1 percent, the report points out.

In the FDIC’s estimation, community bank management of asset quality has been another “bright spot” in Michigan. Most major loan categories saw year-over-year declines in past-due rates, which serve as a leading indicator of asset quality, according to the report.

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