Tuesday, 21 October, 2008

Michigan banks - already taking a beating from a downtrodden state economy - now are under pressure from the national financial crisis.

That's led to losses at some banks - including those with Lansing-area ties - and forced most to set aside a larger chunk of cash to cover bad credit loans, particular those tied to the housing sector.

Officials hope an injection of $250 billion from the federal bailout package will help, but challenges remain.

"The unprecedented conditions facing banks and the economy virtually guarantee more challenging quarters in the near future," said Michael Price, president and chief executive officer of Mercantile Bank Corp., which has an office in East Lansing.

Grand Rapids-based Mercantile said last week it returned to profitability in the third quarter that ended in September after landing the in the red in the previous two quarters. But the bank has put aside more than $17 million so far this year to cover bad loans, particularly those connected to the housing and construction sectors.

The Lansing area's two largest banks in terms of deposits - Cincinnati-based Fifth Third Bancorp and Cleveland-based National City Bank - are set to report their third quarter earnings today.

Chief among the banks' problems has been a state unemployment rate at or near the highest in the country for months.

The jobless rate was at 8.7 percent last month, 2.6 percentage points higher than the national rate.

"One of the challenges that we're facing in the current economic climate is the uncertainty around the length and depth of the recession we're in," said William Hartman, chairman, president and chief executive officer of Citizens Republic Bancorp Inc., which has 14 Citizens Bank branches in the tri-county area.

Flint-based Citizens reported last week it lost $7.2 million during the third quarter.

Most banks share the same problems from a shaken housing market and tighter access to capital, said Brad Milsaps, an analyst with Sandler O'Neill & Partners LP who follows several Michigan banks.

The nation's nine biggest banks so far have said they'll participate in a $700 billion federal bailout, but most regional and smaller banks have yet to decide.

"All banks are going to take a hard look at it," Milsaps said.

Joseph Reid, chairman and chief executive officer of Lansing- and Phoenix-based Capitol National Bancorp, said his company would look at the deal.

Under the government's plan, which would inject capital in exchange for an equity stake, banks would pay a 5 percent return for the first five years.

"That's a pretty good deal," Reid said.

Trying to get ahead of future potential problems with bad loans and declining property values, Capitol last week said it set aside $25 million. That was the largest chunk of a $32.5 million third-quarter loss for the parent of Lansing's Capitol National Bank.

Reid said the federal program should help get the banking sector functioning again.

"But straightening out every other industry sector, that's going to be a different challenge," he said.

Source: http://www.lansingstatejournal.com