Volume 2, No. 1
March 2006

Edward Reilly
Key Bank Names New Local President
ABN AMRO Wins J.D. Power Award
Mike Gould
Internet Evil By Mike Gould

Ann Arbor Area BUSINESS MONTHLY magazine brings the reader the latest business news and information important to the businesspeople in Washtenaw County. Each month articles cover real estate, legal, Internet, employee concerns and the climate of business in the greater Ann Arbor area. There is news about company employees and feature articles on local businesses. We cover business news from Ann Arbor, Chelsea, Dexter, Manchester, Milan, Saline, Whitmore Lake, and Ypsilanti.

Working To Help Your Business
You Can Bank On It

Cliff Sheldon, Exective Vice President for Ann Arbor Commerce Bank. David Lamb, Vice President for Commercial Lending at Fifth Third Bank

By Kate Kellogg

A few decades ago, most area banks occupied a few blocks in downtown Ann Arbor, with one or two reigning in each outlying community. Today, at least 15 local and national banks operate in Washtenaw County. Branches are sprouting throughout the area like spring dandelions. Some of these financial institutions have been here for well over a century while others have forayed into the county over the past few years. The trend is apparent in most high-growth regions throughout the country. Even with the advent of telephone and Internet banking, banks maintain a prominent physical presence in many communities. "With over 91,000 bank offices and branches, and almost 400,000 ATMs, there are more banking locations in the country than movie theaters or shopping malls," boasts the American Bankers Association.

Walt Byers, President of the Washtenaw Region of Mercantile Bank of Michigan

The entrepreneurial spirit is alive and well with the area's banking community.

Shown here are local bankers Cliff Sheldon (top left), Exective Vice President for Ann Arbor Commerce Bank. Top right is David Lamb, Vice President for Commercial Lending at Fifth Third Bank and at left is Walt Byers, President of the Washtenaw Region of Mercantile Bank of Michigan.

In competitive markets like the Ann Arbor area, many are expanding their core services to include investment management, insurance and securities, and auto loans. Several in the county are now offering the new Health Savings Accounts. Especially in Ann Arbor, banks play a key role in the growth of the entrepreneurial community by providing loans and advice to startup companies.

We talked to several local bankers to determine just what makes Washtenaw County such a hot banking market, what types of services their customers clamor for, and how they manage to thrive in this increasingly competitive environment.

Fifth Third Bank
When Fifth Third Bank considered expanding in southeast Michigan, the research showed that the Ann Arbor area might be overbanked, says Jack Riley, vice president and marketing director. Yet once the numbers were crunched and all the factors weighed, Fifth Third concluded that this is a viable market, despite the tough competition.

The bank scores geographic locations on a variety of different levels including employment, consumer income, and housing starts. Washtenaw County scored well in those key indicators, says Riley. "We definitely think it's a growth market, both in Ann Arbor and surrounding areas," he says. "It's definitely a competitive environment but also shows great business development opportunities for us."

Headquartered in Cincinnati, Fifth Third purchased the western Michigan-based Old Kent Financial Corp in 2000. It now has $102.billion in assets and 19 bank affiliates throughout the Midwest. Fifth Third came to Ann Arbor a little over three years ago when it opened a commercial lending office on South State Street. Now that office is set to move to 217 E. Washington Street in downtown Ann Arbor. With 9,000 square feet, the new facility will more than double the office space and include room for growth of the commercial loan team. On the consumer side, Fifth Third recently opened two retail banking centers in town and plans to open two more by 2007. The bank now has about 40 employees here and adds about ten more every time it opens a new center.

"We've been quietly staking our position through the commercial lending division here for about the last four years," says Riley. "Since our financial centers are more visible, many people think we're brand new." In fact, the commercial division has been busy---it undewrote the new YMCA and has taken on several major municipal projects. "Now we feel we have a base on which to build a more visible retail presence," Riley says. Yet Fifth Third doesn't intend to serve the whole county, he adds. "We didn't expect to come in here and claim the share we have in Oakland County. We do want to transfer our skills and carve a good niche."

Fifth Third employs a decentralized model. Business decisions are made at the Southfield Office where the Eastern Michigan affiliate bank is based. When the leadership looked at Washtenaw County, they saw a strong tax base and potential for job creation. With its strengths in biotechnology and health care, the county's economy is more diversified than elsewhere in the state, and less susceptible to downward trends, Riley notes. The area's entrepreneurial spirit also was especially attractive to the bank. "We see Washtenaw County at the top of the state in terms of small business startups," he says. "That's one reason we built this business model of local decision-making---to reach customers like that."

While the centers employ the latest technologies, Fifth Third primarily values its human factor-the people who know the products and who are housed at the local branches, Riley says. Fifth Third's financial centers offer a wide array of financial services, from large commercial loans to individual credits, accounts, and mortgages. The bank employs investment advisors and sells insurance products.

Fifth Third was among the first bank to offer Health Savings Accounts when they became available about a year ago. Despite little advertising, the HSAs have recently picked up momentum. (See sidebar on HSAs.) Riley notes that the Detroit Regional Chamber of Commerce has recommended HSAs to their membership.

Fifth Third's commercial real estate department has been reasonably busy in the Ann Arbor office, despite the overall slowdown of the last year. With development still occurring throughout the Washtenaw County market, says Riley, "the most dynamic part of our commercial bank is right here."

National City Bank
Robert J. Malek, community president of National City Bank in Ann Arbor, attributes the area's banking boom to the University of Michigan's presence, the population's relatively high income level, and the cultural offerings that attract new people and businesses. Banks and branches are proliferating throughout the county in response to the needs of growing and vital communities, he believes.

"The density of rooftops here means lots of depository and investment dollars are available. It follows that banks should come in and grab a market share." And competition is good for the customers because it produces higher quality service at reasonable prices, he adds. "Is there a perception that the area is becoming overbanked? I'm not aware that it's a problem."

Headquartered in Cleveland, National City is the eighth largest bank in the country and has $145 billion in assets. As such, it brings many resources to its clients. The 13 Washtenaw County branches operate much as community banks, Malek says. "All of our decision-making is local. Our 140 employees live as well as work here," he says. In fact, National City's history in the community extends back to the Depression era, when Ann Arbor Bank & Trust was formed. First of America purchased that bank, and National City Corp. acquired First of America about seven years ago.

The recent rise of community banks in the Ann Arbor area has especially benefited local residential and business clients. Three or four years ago, the large regional banks displayed poor service and were a little more restricted when lending money to business clients. But now they have increased their service levels and focused on personalized attention to clients, notes Malek. "They're doing a great job of serving the client base now."

Besides investment management and traditional banking products for consumers, National City has in-house capital market capabilities for commercial customers. Those range from public finance---including bonds enhanced by letter of credit---to mergers and acquisitions services, "We offer one-stop shopping when it comes to commercial needs," says Malek.

The bank is now providing Health Savings Accounts directly through branches. Since the program has not yet been widely publicized, response has been fairly slow at this point, says Malek. But he believes these tax-free accounts for medical expenses may take off as individuals and employers gain a better understanding of the product. Mortgage financing has softened a bit lately, particularly in the residential area, "It has cooled down from 2003, 2004, and early 2005, when it was really flying," Malek says. Area realtors and community leaders are making similar observations, especially about the higher-priced home market.

But overall, demand for all banking products and services is growing. National City is looking at other potential branch locations in the area to accommodate that growth. The bank's main office at 101 South Main, in the heart of the city's "financial district," reserves some space for the Ann Arbor Art Center but is otherwise full. Malek says an upgrade of that facility may soon be underway.

Ann Arbor Commerce Bank
Unless the customer is requesting a multimillion loan, Ann Arbor Commerce Bank "can take care of just about anyone," says Cliff Sheldon, executive vice president for Ann Arbor Commerce Bank. The full-service community bank has been serving commercial customers and consumers in town since 1990. It is among several community banks that have sprouted up in the past 15 years after the rage for mergers and acquisitions subsided. Ann Arbor Commerce provides consumer and business loans, mortgage products, and the full gamut of standard banking services and products. "We can't take care of General Motors and we don't have an international department, but we can meet the needs of most any business or individual in Ann Arbor," says Sheldon. He jokingly refers to the bank's one building on South State Street as "our world headquarters."

As the bank's customer base has grown, so has demand for new services. A trust and investment management department was created in 1998. The bank also added Internet banking to meet the demand for electronic services in "this very tech-savvy county," says Sheldon. In keeping with its role as a community bank, Ann Arbor Commerce works closely with consumers on home mortgages. The bank provides both secondary market and direct (portfolio) loans), which may require less borrower documentation than loans sold to the secondary market. "Most banks just provide secondary market financing but in some cases, that's not a good fit for the customer," he says. "We will make portfolio loans available for one to four family units. That's an option that some of our applicants appreciate."

At press time, Sheldon reports the interest rate for a 15-year, no-point mortgage is 5.875. Loans are not booming at the level they were a year or so ago he says. "Most everyone who wanted to refinance has done so. People are reluctant to make any changes until rates come back down." However, enough people are still buying homes in the area to keep the demand for home loans reasonably strong. That goes along with the general strength of the Ann Arbor area's economy, Sheldon notes. The U-M and other longstanding employers help maintain a solid economic base compared to other parts of the state.

Ann Arbor Commerce also recently began offering reverse mortgages, loans against one's home that the owners don't have to pay back as long as they live in the home. These loans carry many regulations and some require the applicant to be of a certain age. "It's a perfect product for an older person who wants to use the equity they've built up so they can remain in their home," says Sheldon.

The bank also offers the new Health Savings Accounts for individuals with high-deductible insurance plans. They are becoming attractive to businesses that are trying to contain health care costs. As HSAs become more widely understood and used, businesses may find ways to balance higher deductible plans with salary increases. At least that's the hope, says Sheldon. "If employers can work out ways to pass any health care savings on to employees, that's a win-win situation."

Ann Arbor Commerce is continually looking at product offerings to find ways to satisfy customers and keep ahead of competitors, says Sheldon. "As times change, we have to make sure we're meeting the needs of the growing senior market and area families, as well as the business community" he says. Mercantile Bank

Mercantile Bank is among the newest of the newcomers to Ann Arbor. Founded just eight years ago, the bank saw an opening in Grand Rapids when Fifth Third Bank bought out Old Kent. Mercantile of West Michigan quickly established itself as the community bank of the Grand Rapids area and now has $1.8 billion in assets. When it opened new branches in Lansing and Ann Arbor last year, the bank dropped the "west" part of its charter name, becoming simply Mercantile Bank of Michigan.

Like Fifth Third Bank, Mercantile uses a rather decentralized business model. The Lansing and Ann Arbor banks have local authority to base decision-making on their own markets, says Walter Byers, president of Mercantile's Washtenaw Regional Bank. All 12 employees in the Ann Arbor office on West Eisenhower Parkway are seasoned banking professionals who are familiar with the local financial market. Byers was president of Bank of Washtenaw before it was acquired by Community Bank of Dearborn and also worked for Manufacturer's Bank before it merged with Comerica.

The collective experience of the new Mercantile team "makes us feel that we can successfully compete in a heavily banked market," says Byers. Since opening last September the bank already has $10 million in deposits and a growing loan portfolio. "No matter how many banks we have here, the products are basically the same," he says. "So it really comes down to the people who deliver those products."

While Mercantile offers all the standard retail products other banks do, about 90 percent of its business is commercial. In both the retail and commercial areas, the emphasis is on people. In fact, Mercantile looks first for local groups of officers and staff who are willing to be part of the enterprise. "They don't just choose a location because it looks like a good market," he says. "They look for key senior bankers who live in the area, know the local chamber, United Way, and the nonprofits." The Ann Arbor group met that requirement.

The bank is starting to set up some Health Savings Accounts for business customers and will provide information on the new program to anyone interested.

Mercantile hopes to eventually build and own, rather than lease, a permanent office in town. While the bank sees opportunities to expand as it gains strength, "We don't plan to put a branch on every corner," Byers emphasizes. Rather than an exclusively bricks-and-mortar organization, Mercantile prides itself on "taking the bank to the customers." For example a mobile courier service goes out to business customers to pick up deposits. All customers may take advantage of a universal ATM card they can use fee-free at any facility in the country. The bank absorbs the charges.

Byers has been pleased with the bank's activity in the commercial loan market. He sees it as "steady and strong" with development continuing and business still investing in business. Despite people's dark views of Michigan's overall economy, says Byers, Ann Arbor and Washtenaw County "seem to divest away from the bad areas and reinvest in growth areas."

Comerica Bank
With $53 billion in assets, Comerica Bank is one of the 25 largest banks in the country. Founded and based in Detroit, the bank, in various forms, dates back to 1849. It now has coast-to-coast subsidiaries and three operating units that focus on business banking, consumer banking, and investment and insurance.

Comerica has nine banking centers in Washtenaw County alone. In just the last five years, the bank added six banking centers in Washtenaw and Livingston Counties. "We are investing capital in this area because we view it as a growth market," says Kevin Nelson, Group Manager at the main Ann Arbor office. Like other large banks, Comerica strives to deliver services at the community level. In fact, it can serve as a community bank precisely because it has the resources to do so. The commercial arm works with local developers and contractors while the investment side sells securities and provides investment advice and financial planning for local customers. The retail branches provide insurance products, mortgages, home equity lines, and auto loans. The small business loan group works with the many startups and small businesses in the county.

Based on his observations of how customers are performing, Nelson expects to see continued growth in the region's banking market. That's especially true for the commercial customers he works with in the middle-market loan group of $10 million and above. He is not surprised by the growth in the banking industry in Washtenaw and Livingston Counties. "There are lots of opportunities here and the banks will follow," he says. "We have the retail shops, the home building, and infrastructure to support continued growth." On the consumer side, he notes that the area's median income remains above average, due in part to the U-M and area hospitals. Residential development keeps moving forward as well.

Home mortgages and other loan activity remains stable for the bank, despite some uncertainty regarding interest rates. Nelson noted that economists, including Comerica's Dana Johnson, expect short-term interest rates to increase by a quarter to half a point sometime this year. And sure enough, Federal Reserve Chair Ben Bernanke recently hinted to Congress that such an increase would reduce the risk of inflation.

Nelson notes that the current "flat" yield curve is having an unusual effect on borrowing. (He refers to yields of U.S. Treasury securities, which reflect the overall direction of interest rates.) Right now, long-term rates are about as low as short-term rates. He expects the yield curve to eventually return to the traditional situation where long-term loans have higher interest rates. "That won't help people who are barely getting by," he says. "But it probably won't have much impact on customers within our portfolio, who are doing well."

Sidebar on Health Savings Accounts

A growing number of area banks are serving as qualified trustees for the new Health Savings Accounts. HSAs offer tax benefits to both the employer and employee, says Sandy Ross, vice president and retail branch officer at Mercantile Bank in Ann Arbor. The employer who contributes to an employee's HSA gets a write-off. The employee who sets aside money in an HSA gets a tax-sheltered, interest-bearing savings account, similar to an IRA, she explains. The accounts also are available to the self-employed who can do comparison shopping for an insurance carrier or find one through a local chamber of commerce. And unlike a "use it or lose it" flexible spending plan, the money in an HSA rolls over from year to year---even if the individual changes employers.

Most anyone who has a high-deductible health plan (at least $1050 for single coverage or $2100 for families) is eligible to establish an HSA as long as they are not covered by Medicare Mercantile charges just $20 to set up an HSA. "You can access your account by debit card or check to pay for dental and vision as well as other medical expenses, and prescription and non-prescription drugs," says Ross. And as the account grows, the customer has the option of turning it over and investing the money in mutual funds or other investment vehicles.

While not a panacea to the high cost of health care, HSAs provide some attractive money-saving features. High-deductible health plans generally have lower premiums; HSAs offer tax-free interest; and they allow freedom of choice in providers.

"As the public gains a better understanding of these accounts, I think many consumers will find them a great way to save money," says Ross. Some experts predict that families could save as much as $1,000 a year by switching from traditional low-deductible health insurance or HMO plans to HSAs. One national consulting firm estimates that by 2010, about ten percent of all insured Americans will have an HSA, reported the New York Times last January.