Midwest Bankers See an Increase in Delinquencies, Foreclosures and Loan Losses


SOUTHFIELD,Mich., April 30, 2009 – A majority of Midwestern bankers anticipate an increase in the number of delinquencies (73%), the number of foreclosures (56%) and consumer (55%) and commercial loan losses (72%), according to Grant Thornton LLP’s 16th Bank Executive Survey, conducted in conjunction with Bank Director magazine. Approximately half anticipate a decrease in demand for consumer loans (52%), residential mortgage loans (49%) and commercial loans (41%).

“These survey results point to the backlash against the lax underwriting standards that contributed to the credit crisis,” said Todd Sprang, Grant Thornton’s Financial Institutions Midwest practice leader. “To avoid repeating history, financial institutions will have to strike the balance between practicing prudent lending and jump-starting the lending that will help spur economic recovery.”

Below is a sampling of questions and replies:

Compared to 2008, what changes do you anticipate for your bank in 2009?

1. Increase
2. Decrease

Residential mortgage loan losses
1. 48%
2. 12%

Consumer loan losses
1. 55%
2. 8%

Commercial loan losses
1. 72%
2. 9%

Credit and payment card fraud losses
1. 39%
2. 6%

Documentation fraud losses
1. 14%
2. 13%

Commercial loan demand
1. 27%
2. 41%

Consumer loan demand
1. 12%
2. 52%

Residential mortgage loan demand
1. 11%
2. 49%

Number of delinquencies
1. 73%
2. 2%

Core deposit balances
1. 57%
2. 7%

Customer refinancing of loans
1. 27%
2. 17%

Number of foreclosures
1. 56%
2. 9%

Use of derivative financial instruments
1. 2%
2. 41%

Source of liquidity
1. 18%
2. 24%

Midwest bankers cite core deposits (93%) as the most frequently anticipated means of funding bank growth in 2009. Seven in 10 Midwest bankers (69%) anticipate using Federal Home Loan Bank advances to fund bank growth in 2009, which is a drop from those who actually used them in 2008 (79%). Only 5 percent of Midwest bankers issued common equity as a means to fund growth in 2008, and only 4 percent issued preferred stock. To fund growth for 2009, 16 percent anticipate issuing preferred stock, while 12 percent anticipate issuing common equity.

Please indicate which of the following vehicles you used to fund your bank’s growth in 2008 and whether you plan to use them again in 2009.

1. Anticipated 2009
2. Used 2008

Core deposits
1. 93%
2. 94%

Brokered deposits
1. 44%
2. 54%

Loan sales
1. 39%
2. 33%

FHLB advances
1. 69%
2. 79%

Sales leaseback transactions
1. 4%
2. 3%

Issue trust preferred securities
1. 9%
2. 6%

Issue subordinated debentures
1. 4%
2. 0%

Issue covered notes
1. 1%
2. 0%

Issue preferred stock
1. 16%
2. 4%

Issue common equity
1. 12%
2. 5%

The majority of bankers in the Midwest agree with the following items: Increases in FDIC deposit insurance premiums will have a significant effect on the level of their banks’ operating expenses, which will have to be offset by cuts elsewhere (82%), consumers have diminished confidence in the banking industry (75%), and their banks will maintain their current underwriting standards for the foreseeable future (69%). However, they disagree that the re-pricing of ARMs will have an adverse impact on their banks’ loan losses in the coming year (81%), and that fair value accounting is the most appropriate method for banks to recognize the value of their financial assets held for sale or trading in earnings (63%).

To grow and/or compete profitably in the coming year, Midwest bankers plan to conduct promotions to attract new customers to existing products and services (76%) and increase cross-selling efforts to current customers (71%). Less than a quarter of Midwest bankers plan to expand their banks’ market areas by building additional branches (19%), acquiring additional branches (22%) or selling or closing branches (14%).

“As evidenced by our respondents, many banks in the Midwest are going back to basics and refocusing on their existing service offerings,” added Sprang. “In this environment, Midwestern banks cannot simply expand for the sake of growth. However, well-capitalized banks can seize the opportunities created by the downturn to buy competitors and expand market share.”

More than half of the Midwestern bankers (57%) report that they are not familiar with IFRS, while 23 percent say that it is not yet a significant issue for their bank. Only 3 percent of Midwest bankers say that their banks are prepared to switch over to IFRS, and another 1 percent have sent someone to training to learn about IFRS.

“While U.S. adoption of IFRS may be inevitable, it may not be catastrophic for banking institutions,” says Dorsey Baskin, partner in Grant Thornton LLP’s National Professional Standards Group. “Given the existing extent of convergence between applicableU.S. standards and IFRS and the ongoing efforts of the FASB and IASB to converge standards that remain out of sync, the full adoption of IFRS many years in the future could turn out to be more of a whimper than a bang.”

Which statement best reflects your bank’s current status regarding the implementation of IFRS?

IFRS is not yet a significant issue for my bank – 23%

My bank has sent someone to training to learn about IFRS – 1%

My bank has started to analyze the impact of IFRS – 10%

My bank is prepared for the change to IFRS – 3%

I don’t expect IFRS to apply to my bank – 11%

I am not familiar with IFRS – 57%

For a copy of the survey, please go to www.GrantThornton.com/BankSurvey or e-mail Grant Thornton’s Financial Services practice at FinancialServices@gt.com.

About the survey
Grant Thornton’s Bank Executive Survey provides a snapshot of the banking world, presenting a compilation of opinions of industry leaders on the current state and future direction of the industry. In early November 2008, Bank Director magazine mailed questionnaires to a national sample of 3,000 chief executive officers and other senior officers of banks and savings institutions. A total of 339 completed questionnaires were returned for a response rate of 11.3 percent. In the Midwest, there were 95 respondents.

Sixty-two percent of the respondents report assets of less than $500 million, with 38 percent reporting assets greater than $500 million. One-third of the bankers reported that their institutions are publicly held, 55 percent are with private corporations and 12 percent have mutual charters.

About Grant Thornton LLP
The people in the independent firms of Grant Thornton International Ltd provide personalized attention and the highest quality service to public and private clients in more than 100 countries. Grant Thornton LLP is theU.S. member firm of Grant Thornton International Ltd, one of the six global audit, tax and advisory organizations. Grant Thornton International Ltd and its member firms are not a worldwide partnership, as each member firm is a separate and distinct legal entity.

In the U.S., visit Grant Thornton LLP at www.GrantThornton.com.

About Bank Director
Bank Director is the leading information resource for senior officers and directors of financial institutions, credit unions, insurance companies and investment advisors. The quarterly publication provides readers with the tools necessary to successfully handle the governance challenges impacting boards including mergers and acquisitions, retail strategies, compensation and technology. Each issue also features insightful commentary from former FDIC chairman Bill Seidman. Since its inception in 1991, Bank Director has become recognized as the essential resource for top decision-makers in the financial services industry. For more information, visit www.bankdirector.com.

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