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.
Banks, Businesses Forge
Through Lean Times
By Alex Harrison
Many in the local business community wrapped up 2007 by battening down the hatches and adopting new strategies for working harder and smarter in '08. Some sectors in the Ann Arbor area have the luxury of remaining "cautiously optimistic", a phrase we've heard from many in the last few months. But for those whose bread and butter deal with the development, construction, or sales of real estate- well let's just say that "cautious" is quite the understatement, and optimism, particularly in the short term, is fast becoming the stuff of naiveté.
To paint the Ann Arbor/Washtenaw County area with broad brush strokes would be to say that commercial loan activity has slowed. However, Ann Arbor itself has never been known for its generalizations or homogeneity. More accurately, the Ann Arbor area is unique, constantly drawing entrepreneurs of all types-and according to local bankers there are plenty of businesses experiencing positive growth who are taking advantage of the competitive loan market.
One generalization that the banking community can agree on: every business, even those within the same sector, has unique needs and concerns during these lean times, and those can be addressed most effectively when there is an open, dynamic relationship between that business and their banking institution.
Checking the Pulse of Borrowers
Dave Lamb, Senior Vice President of Business Banking at Ann Arbor's Fifth Third Bank explains that from contractors to engineering firms, their customers involved in real estate are feeling a crunch that ultimately impacts their ability to remain in good standing with loan repayment. "Overall, our commercial delinquencies at the end of 2007 for most sectors were very low, really only marginally worse than in 2005 or 2006. But for our residential real estate customers, those delinquencies are high right now." He went on to explain that, "People in this area, because of the cyclical nature of boom and bust with the Detroit auto industry are somewhat used to the ups and downs. But now with the residential housing market being in the shape that it's in, people are worried that it may not come back."
Larry Grace, Vice President of Commercial Banking at Bank of Ann Arbor, commented to the shared sense of distress within the area market. "The economy is slower than we're accustomed to seeing. The area hit the hardest of course has been single family construction, home sales and the like, and I think 2008 will be another difficult year in that regard." He also pointed to the mix of caution and worry shared by borrowers that he expects will continue in the coming year. "There is certainly reluctance to take on additional debt right now, because borrowers just don't know if the new sales or business will be there to pay back any new debt they'd take on." Grace also acknowledged that this trepidation is not localized to the Ann Arbor area, and for that reason The Fed is trying to lower rates is to disperse more borrowing and generate more economic activity.
Amid the tension created by those businesses linked closely to real estate, there are encouraging signs of borrowing in other sectors. "We deal with a number of the technology companies in this community that have gotten venture capital funding and some state funding. A number of those firms are doing well. They're smaller, but they're becoming a larger part of the local employment base," explains Grace. "Many of them are growing and succeeding. These are privately held companies, and so you don't see a lot of headlines about them. In fact, a lot of these companies don't even have a product to sell yet because they're still in the development stage. But they are growing, attracting financing, and they're hiring people and occupying office space. So that's encouraging."
Lamb has also noticed an upturn for customers involved in other industries. "Manufacturers are not taking out loans as aggressively as before because they're just not expanding at the rate they once were. However, the service industries such as consulting firms and businesses that serve a niche market on a nationwide or worldwide scale are taking out loans for expansion." Grace also noted, anecdotally, that while most of their retail clients are seeing slower sales volumes from a year ago, clients operating restaurants in the downtown are remaining steady if not better over the prior year.
A Cooperative Approach to Resuscitation
"There is no rule book for what's going on right now," says Todd Clark, President and Chief Executive Officer at United Bank & Trust in Ann Arbor, regarding the crisis that commercial customers involved in the residential real estate sector are facing. "How are we dealing with it? We're trying to be as proactive as possible, and work with each case individually."
For Clark, this has meant spending the last quarter of 2007 meeting with every one of those clients to fully assess their situation and then create a two-year plan to deal with foreseeable shortcomings. "This is where creativity and flexibility on our part have to come into play," says Clark, who explains that often, these plans include figuring ways to stretch out repayments until properties are sold-a strategy that also requires patience and good faith.
Clark also felt it important to meet with other area banks to speak philosophically about how they are dealing with the issue of customers in the residential real estate sector. "At the end of the day, we're all in this together. We are in it with the clients because there's nowhere else for the borrowers to go."
"In terms of loan activity," says Grace, "for customers who are having difficulty, we are trying to work with them to restructure payment arrangements when possible. In many cases these are solid businesses that have been well run; it's not a question of competence on the part of the owner. It's just a difficult market and they need assistance to get through the difficult time."
Lamb also agrees that in these cases the bank and the borrower should become close partners. "Our basic strategy is that foreclosing on delinquencies could wreck the market. We're better off helping the builder or the developer, for example, because they'll always be able to sell at more of a profit than the bank ever can."
Clark also notes that it in this competitive market it is to a local bank's advantage to be on the lookout for opportunities with viable clients who may have been left out in the cold by their previous institutions. "When other financial institutions recoil or disengage when a client's situation gets complicated, we can bring our expertise to the table to find a solution. We have such a critical role in this local economy because, at the end of the day one of the key economic drivers are our willingness and our ability to work with companies of all sizes in a way that we all benefit- when that happens, the whole economy benefits."
Tailored Services, Exceptional Delivery
Despite challenges to the local economy, banks in this area seem to be emphatic in asserting that they have plenty of money to lend and are looking for good loan opportunities. Additionally, the Federal Reserve is bringing rates down trying to make borrowing more affordable.
When asked about tighter approval standards for loans, Charlie Crone, Regional President of Comerica Bank, draws a distinction between residential and commercial lending. "When it comes to business loans, I don't think there's any change. There are still lots of lenders in the Ann Arbor market and all of us covet those customers."
Crone goes on to explain that up through late last year he has observed pressure on loan margins everywhere due to competition, which means the balance was tipped in favor of the borrowers. "As you go through a credit cycle and the potential borrower's portfolio quality deteriorates, the banks tighten their credit standards, which include pricing. When everybody does that you might perceive that as less competitive or tougher for borrowers." Having so many banks in the area still keeps rates in Ann Arbor highly competitive, however.
"From a lending standpoint, this market has always been good," says Lamb. "There are lots of community banks here because this community has always been the bedrock of the southeastern Michigan area." He also notes that by and large, on a risk-adjusted basis, interest rates have gone down based on the sheer competitive nature of the Ann Arbor market. "If you are a company doing fairly well, you will be able to get great financing terms-and if you're not, you should start calling around."
There are basic elements of a commercial loan-the term of the loan, which typically does not exceed five years, and amortization, or the payment term for the loan. The term of the loan represents the initial time period the bank is willing to commit to a loan and the interest rate for that time period. Amortization of the loan represents the time period used for calculating the actual monthly payments using the determined interest rate.
Depending on the collateral being used to support the loan, the amortization time period can be longer than the term of the loan. For example, explained Clark, if a commercial building was being financed in downtown Ann Arbor, the term of the loan could be 5 years at a 6.2% interest rate and the amortization of the loan could be 25 years. Thus the bank could commit to a fixed interest rate of 6.2% for the first five years but the actual monthly payments would be calculated based on a 25 year repayment period.
Once those parameters are established, each loan can be relatively unique and tailored to fit the client. Therefore, commercial loan "products" aren't nearly as common as services that assist clients in obtaining loans, as well as cash management/account management services.
This past year United Bank and Trust added a new line of business to address a bigger segment of their commercial client base. This new company, called United Structured Finance Company, specializes in originating Small Business Administration loans (SBA 7a, SBA 504, and SBA Express Loans)-simplifying a process that can often be complicated and riddled with red tape.
"The sophistication of treasury management products is one of the biggest changes in terms of banking and local/small businesses," says Lamb. Services like electronic deposit allows businesses to scan check payments in their office which transmits directly to the bank. This means a quicker turn-around, enhanced security, and fewer trips to the local branch to make deposits.
Crone reports that Comerica recently kicked off their winter sales campaign, focused on deposit development and offering incentives to customers opening new commercial accounts. But beyond easy deposit methods and treasury management, he asserts that "businesses are looking for world-class service and execution-having a team of people at the institution that they know and feel knows their company well."
Crone points out that an area like Ann Arbor attracts businesses spanning a range of "life cycle" stages: pre-product, pre-revenue, pre-profitability, or stabilized and generating profit. "Each one of those companies needs basic banking services and these are important clients to banks as well as those with a solid record of profit." A solid group of experts around them- a good lawyer who has a client base of start-ups, a CPA firm with a client base of emerging companies, and a bank that can know them and help them with their core banking services at an affordable price.
As the economy in the Ann Arbor area remains uncertain, commercial lenders seem to be leaning more than ever on adopting a strong philosophy of service, as opposed to a bullet-point list of products and account types. "It's still a people business, and relationship is everything," says Lamb. "The biggest question all businesspeople have is 'What happens if I have a stumble? What are you going to do?' And people choose a lending institution based on how a bank can answer that question."
Clark points out that each bank has different strengths that match up well to different businesses. "A good bank understands what the business owner is trying to achieve and tailors a product to meet those needs. The hardest thing today is to do anything on your own." By securing a quality relationship with their financial institution, as well as a trusted circle of legal and accounting advisors, local businesses will have the best chance of finding creative solutions through thick and thin.