Volume 5, No. 1
March 2009

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"The Lilly Ledbetter Fair Pay Act - Are Employers Ready?" By Mel Muskovitz

Small Business & The Internet
By Mike Gould


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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 Careful About Commercial
Loans, But Capital Still Flowing

Peter Schork, President and Chief Operating Officer, Ann Arbor State Bank
Peter Schork, President and Chief Operating Officer, Ann Arbor State Bank

by Mark Ziemba

Although the tough economy has tightened lending standards for commercial loans, Ann Arbor banks are still supplying capital to business, especially small business.

Small businesses are poised to take advantage of new opportunities in these tumultuous times, and they should, because they generate the jobs that will power economic recovery. According to the Small Business Administration, 99.9 percent of all businesses in 2007 employed less than 500 employees, and small businesses have created between 60 to 80 percent of new jobs since the mid-1990s. In addition, small businesses employ half of all Americans and generate half of the nation's nonfarm, private, real gross domestic product.

Larry Grace, Bank of Ann Arbor First Vice President, Commercial Banking.
Larry Grace, Bank of Ann Arbor First Vice President, Commercial Banking.

Lending Windows Open in Ann Arbor

"When there is a recovery, the recovery here and elsewhere is going to come from the small business arena." says Peter Schork, the president and chief operating officer at Ann Arbor State Bank, which just opened its doors in January 2009.

Ann Arbor State Bank plans to serve 5- to 50-person businesses committed to the local community, says Schork. He says that the bank expects to lend $20 to $25 million annually in commercial capital by 2010.

"Banks are being careful, but banks are lending," says Schork regarding commercial loans. "There's money to be borrowed in Ann Arbor."

United Bank & Trust -- Washtenaw President and CEO Todd Clark says, "Banks play a critical role in the economic development of the community."

Started in 2001, United Bank & Trust -- Washtenaw typically serves businesses with 150 or fewer employees and annual revenues of $30 million or under. It was named the number-one 2008 SBA lender for Washtenaw County in terms of both number of loans and dollars lent. Its commercial loan portfolio grew 15 percent in 2008, from $200 million at the end of 2007 to $230 million at the end of 2008.

"We are definitely still in the business to make loans," says Clark, who encourages everyone to think locally. "The more money that we can keep in our community and reinvest," he says, "the better off all of us are going to be, long term."

Begun in 1996, Bank of Ann Arbor is community owned. "Ninety percent of our shareholders live within 25 miles of here," says Larry Grace, Bank of Ann Arbor First Vice President, Commercial Banking. He points out that the board and senior management own 40 percent of the bank. "They're very interested in what goes on at the bank and what goes on in the community," he says.

Bank of Ann Arbor's typical clients are businesses with 5 to 50 employees. The bank's commercial loan portfolio grew 5.2 percent in 2008, from $251 million at the end of 2007 to $264 million at the end of 2008.

"It's definitely a slowdown," says Grace regarding the commercial loan growth. "We might normally see 7 to 8 percent."

"We still have money to lend and we're looking for the right opportunities," Grace says. "It's a difficult environment to borrow, but we have not closed our lending window."

Even local branches of bigger banks recognize the importance of community lending. Originally founded in 1849 in Detroit, Michigan as the Detroit Savings Fund Institute, Comerica is now a national bank based in Dallas, Texas.

"We have some customers in the portfolio that are third and fourth generation in the area," says Comerica Bank Senior Vice President David Sass, the Middle Market Banking group manager at the Ann Arbor office. "They truly take pride in what they do," he says. He enjoys playing a role in helping those businesses grow. "It's what gets me out of bed every day."

Sass says that Middle Market Banking serves businesses with typically 10 to 1,000 employees and annual revenues from about $10 million to $300 million. He adds that there is a small business banking operation in the office, as well.

Comerica Incorporated Vice President and Midwest Market Media Manager Sara Snyder says that the company's lending in Michigan grew by 3 percent in 2008. Although the figure represents the entire lending portfolio, Snyder notes that Comerica is primarily a commercial lender.

Despite the rough economy, Sass says that Comerica continues to loan to businesses. "I don't think our lending policies have changed," he says. "We're just taking a slightly harder look at financing new businesses." He adds, "We're certainly committed to the area. We are supporting existing customers, and we are actively seeking new customers that meet our credit parameters."

Banking Industry Smaller, But Still Healthy

The economy has consumers concerned over the strength of the financial industry, but most banks are still healthy.

There are fewer banks, but this has little to do with bank failures. The number of FDIC-insured banks dropped from 9,614 in 2001 to 8,384 in 2008, which amounts to a loss of 1,230 banks, or a 12.8 percent drop over eight years. Only 50 banks failed in those eight years, so only 4.1 percent of that drop can be attributed to failures.

Average annual bank failures have been minimal. From 2001 to 2008, on average there were 8,944.5 FDIC-insured banks. There were only 6.25 bank failures annually on average over that same time period, which amounts to only 0.07 percent of those banks. Although the worst year for bank failures in that period was 2008 with 25 banks, even that amounted to only 0.30 percent of all FDIC-insured banks that year. Of all the bank failures from 2001 to 2008, only two have been Michigan banks: Shelby Township's New Century Bank in 2002 and Northville's Main Street Bank in 2008.

What Banks Are Looking for in Commercial Loan Clients

The economy has affected the commercial loan climate, but companies that understand their market, manage costs, demonstrate stability in these difficult times and communicate with their bank can better their chances for commercial loans.

Businesses should pay closer attention to their market, particularly their role in it and their competitors.

"What's your niche? What are you trying to do that's different?" asks Ann Arbor State Bank's Peter Schork.

David Sass at Comerica Bank's Middle Market Banking wants to see a strong management team that knows its market. "They know the sector they're in very well; they know how they fit into that," he explains. "If they're not already a market leader, they know what the market leader does well and they can emulate that to try and nip away at their heels."

Larry Grace at Bank of Ann Arbor's Commercial Banking department suggests that businesses should come prepared for commercial loan discussions with information about their industry, including key competitors.

Managing prices and costs is especially crucial in this difficult economy.

United Bank & Trust -- Washtenaw's Todd Clark says, "There is much more focus on balance sheets." He says, "We're trying to make sure that they've addressed their new cost structure, given the decrease in revenues." Clark says that businesses may have seen 20 percent decreases in revenues in 2007, and again in 2008. "We are spending more time with small businesses and new prospective clients concentrating on the strength of their balance sheet and what they've done to cut expenses."

He adds, "I would encourage them to revisit their cost structure and become as lean as possible to get through this."

Schork emphasizes understanding prices and managing costs in order to make sure that the business is able to continue making money.

"Does the business understand how they are making money?" asks Schork. He points out that restaurants need to have good food to draw customers, but makes more of its money on beverages. Prices need to be structured properly in order to maintain revenue.

"Does the business understand their expense side?" Schork asks. "What if your cost goes up?" He cites the pizza delivery business, which was hit with increases in the price of cheese, flour and then gasoline. Raising the price in the middle of a recession won't encourage business, either, he says.

Location is a key factor in business, but it has a cost, too. "Your cost of location, does it make sense for your business?" asks Schork. Businesses may need to pay for a higher location cost to be more centrally located, establish a name and draw business.

Banks are also looking for management to demonstrate talent at navigating rough economic waters.

"What we're really trying to see, as much as anything, is stability," says Grace. "It really comes down to management performance." Grace says that the bank evaluates whether the management can achieve success despite any issues.

Sass advises businesses to ask themselves if they're satisfied with their performance in a sector, and if not, "Have you looked at diversifying?" Citing automotive manufacturers that might be struggling with decreased demand, he asks, "Could you get into aerospace? Could you get into medical? Could you get into doing work for off-road equipment manufacturing?" He's looking for companies that are thinking about ways to "navigate through downturn."

Schork asks some of the same questions. "How are you going to grow your business? Have you thought about downturns that are not of your making?" He says, "We're looking for businesses that have business plans that are sustainable."

Communication with your bank is another important step.

"Keep your banker informed of the good and the bad." says Grace. "If you've been having difficulty, if you've been losing money or sales have been declining," he says, "and you're looking for an increase in your line or just a renewal, start early." The reason, he says, is that "the process is likely to be longer than it is normally."

Clark also advises businesses to stay in contact with their bank. "The better the communication line between the bank and the client, the better chance they have of successfully navigating through this economic downturn."

Economy Complicates, But Commercial Lending Available

"It's certainly more difficult than it was a year ago," says Bank of Ann Arbor's Grace. "The economy itself is weaker and more companies are having difficulty."

"We're seeing companies that have historically performed very well," says Grace, "having difficulty in this current environment."

Grace emphasizes, "We still have good capital position. We still have excellent liquidity. As a result we're still trying to book good loans."

Sass at Comerica agrees that the economy is challenging. "We're on the front end of a recession, so businesses are challenged," he says, but "we're all in this economy together."

Ann Arbor State Bank's Schork says, "This is all unchartered territory." Still, he believes the Ann Arbor-area is enhanced by the strength of the University of Michigan and a diversified economy.

"Small business lending will be the main source of recovery, not just in Michigan, but across the United States," he says.

Clark says, "In chaos comes opportunity. There are and will be plenty of opportunities for good entrepreneurs to identify needs and satisfy those needs in the local economy."