Originally published August 14, 2011 in Crain’s Detroit Business by Tom Henderson
State and local banks continue to mend. A large majority are making money, and even the most troubled banks have improved the key metric eyed by state and federal regulators when considering which to shut down, according to reports for the second quarter that were filed with the Federal Deposit
Insurance Corp. at the end of July.
Based on the filings, no banks in the area appear in imminent danger of being closed by regulators, following a spate of 11 bank closings in Southeast Michigan since the start of 2008, including two so far this year: Mt. Clemens-base Community Central Bank and Madison Heights-based Peoples State
Ann Arbor-based Michigan Commerce Bank has been viewed by the local banking community as a likely candidate for closure, but its parent company, Lansing-based Capitol Bancorp Inc., has continued to put enough capital into it to keep regulators at bay.
“While a handful of institutions continue to have problems, the metrics show the problems aren’t nearly as bad as they were a year ago,” said Patrick McQueen, state banking commissioner from 1993 to 1999.
McQueen consults on bank mergers and restructurings for his son Charles’ firm, McQueen Financial Advisors of Royal Oak, and in June was named managing director of the banking practice team for Southfield-based turnaround firm BBK Ltd.
“Clearly there’s been improvement on all fronts,” said John Donnelly, managing director of the Grosse Pointe investment banking firm of DPP & Partners. “Banks are more profitable, they have more capital, and nonperforming loans are down. All in all, things feel a lot better.”
One of those improvements has been in a key metric known as a Tier 1 ratio, which is the percentage of a bank’s assets in the form of equity capital.
Banks with ratios below 2 percent are considered severely undercapitalized by regulators and are essentially on death watch and usually near a shutdown by regulators. A ratio between 2 percent and 4 percent is undercapitalized, 4 percent to 6 percent is adequately capitalized, and above 6 percent is well capitalized.
Sixteen of 23 banks in Southeast Michigan improved their Tier 1 ratios in the second quarter. Eighteen banks in Southeast Michigan are now considered well capitalized. Three are adequately capitalized, two are undercapitalized, and none are severely undercapitalized.
The bottom three banks, each operating under consent decrees by regulators to improve performance, all improved in the second quarter. Michigan Commerce Bank went from a ratio of 2.05 percent to 2.8 percent, with First National Bank in Howell going from 3.4 percent to 3.54 percent, and Oxford Bank going from 3.26 percent to 3.76 percent.
“If some banks were in a coma, now they’re at least squeezing your hand at the bedside,” said Donnelly. “There are signs of life. The FDIC is going to be very patient and not do anything rash to give these banks every chance to make it. As long as their capital levels are flat or slightly better, you’re going to see more patience.”
A total of 102 of the 123 reporting banks in the state showed a profit in the second quarter that ended June 30. Four area banks had losses — Flagstar Bank of Troy, Michigan Commerce Bank, First Independence Bank of Detroit and Monroe Bank & Trust.
In the first quarter, 108 of 129 reporting banks reported profits. Five area banks had losses, the same four as in the second quarter and Citizens Bank in Flint.
One added benefit to being profitable again is the reinstatement of deferred tax assets for many banks. At one point they would have carried future tax deductions on their books as assets, but when they were mired in red ink and no profits in sight, those assets had to be wiped off the balance sheet.
With profits restored, those tax assets can be reinstated.
While further closings now seem unlikely, at least for the near future, and while the red ink that was commonplace in the recession and as recently as a year ago has largely turned black, McQueen said: “We’re not out of the storm yet. There are systemic issues.
“What will community banks be doing to be successful in 2012, 2013 and beyond? They were built to be successful on commercial real estate lending, and that’s no longer on the table,” he said.
“They’ll need to be resourceful. They’ll need to find more noninterest income, from things like selling retirement services and providing wealth management services. There’s a lot of thinking going on. The way it was done for years will no longer drive the bus.”