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Banking on Michigan: More Than Just Automation Alley

When you think of Michigan, the first things that come to most of us are automobiles, the city of Detroit and the Michigan Wolverines.

It is not a big secret that the city of Detroit is a big mess right now and is going to be one of the largest municipal bankruptcies of all time. It's a mess that is going to take a long time to resolve. The mistake people are making is assuming that all of Michigan is like the city and that as Detroit goes so goes the state. Nothing could be further from the truth.

Take a look, for example, at what is happening right now in the Western part of the state. PNC Bank (PNC) recently released a report evaluating the prospects of the region and found not just a recovering economy nut a robust one.

The report said, “Southwest Michigan's recovery is one of the most impressive across the Midwest region. Job growth is strong across a range of industries and the unemployment rate has declined dramatically from just above 14 percent to just above 6 percent as of mid-year 2013.” That doesn't sound like a dying rust belt economy to me.

Let's also take a look at a town like Ann Arbor, Mi. The town is home to the University of Michigan and its 40,000-plus student body. The university employs about 30,000 people including 12,000 in its healthcare system.

The school's reputation also attracts technology companies and biotech companies to the area because of their strong research reputation and budget. According to Forbes, the average annual income is around $58,000 and the unemployment rate just well below the national average at just 5.5 percent.

Many parts of the state are already in excellent economic conditions. As the Detroit bankruptcy works its way through the courts the Southeastern portion of the state will also begin to recover.

While the U.S. auto industry has seen its share of hard time business has been improving for companies like Ford (F) and General Motors (GM) and both are still significant employers in the region and will continue to do so. The state is in great shape and I expect it to just get better over the next decade.

Because of this I find some of the bargain-priced banks in the state attractive as long term investment prospects. Over in the western part of the state Mercantile (MBWM) and First Bank (FBMI) are combining to form what should be a regional powerhouse bank. The new bank will be the third largest Michigan-based bank holding company, with $2.9 billion in total assets, $2.4 billion in total deposits and 53 branches statewide.

Investors are going to see a lot more of this activity statewide as banks combine to achieve cost savings and greater exposure to the improving Michigan economy.

Just 20 minutes outside of Grand Rapids in Holland Michigan is the home offices of Macatawa Bank Corporation (MCBC) a 30 branch bank with more than $1.4 billion in assets. The bank suffered during the credit crisis and bald loans reached dangerous levels but the situation has improved dramatically in the past few years.

Non-performing assets have fallen by more than 50 percent and have declined for the 11 consecutive quarters. The shares trade at a slight premium to tangible book value but the franchise and locations could be very attractive for bank desiring to enter the economically strong southwest Michigan region.

In the Ann Arbor area United Bancorp (OTC:UBMI) has 17 branches and about $900 million in assets. The bank has seen credit conditions improve substantially over the past few years and nonperforming assets have decreased from almost 45 of total assets to less than two percent today. Management has been conservative in its practices and loan loss reserves right now are 153 percent of potential problem loans.

The loan portfolio is heavily tilted towards commercial loans with almost half of total loans in commercial real estate or commercial and industrial loans. This segment should continue to improve as the state's economy continues to improve. The Ann Arbor market is going to be very attractive for banks looking to expand and trading right at book value the stock could become a takeover or merger target.

The state of Michigan is in pretty good shape and investors would be wise to consider Michigan banks as part of their long term investment approach. Detroit may be a drag on growth in some parts of the state but it is important to keep in mind that conditions in Detroit should improve substantially when they exit the bankruptcy process.

About the author:

Tim Melvin
Tim Melvin is a value investor, money manager and writer. He has spent the last 27 years as in the financial services and investment industry as a broker, adviser and portfolio manager. He has also written and lectured extensively on the markets with his work appearing on RealMoney.com, DailySpecualtion.com, Benzinga.com as well as several print publication including Active Trader and the Wall Street Digest.

Visit Tim Melvin's Website


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