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Ann Arbor State Bank

Volume 6, No. 1
March 2010


Commercial Real Estate Update

Retaliation #1 On The List of EEOC Claims By Mel Muskovitz

Small Business
and the Internet

By Mike Gould

April Feature:
“Green” Your Business

Read all about
local business
people and firms


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.

Banking On The Future

William Broucek, CEO, Ann Arbor State Bank

 Todd Clark, CEO, United Bank & Trust

Todd Clark, CEO, United Bank & Trust

By David A. Baker and
Margaret J. Baker

There is no question that our local banks are quietly present in the underpinnings of our economy. Local banks and credit unions, unlike the larger regional banks, have a clear commitment to serving the immediate community.

They provide much-needed capital to growing or struggling business, equipping business owners to fight against the odds to build viable businesses that contribute to our community.

There now seems to be a distinct emphasis on working with local banks for two reasons: local banks are in a better position to help and the multiplication effect tends to keep money local and benefits others in the community.

Todd Clark, CEO of United Bank and Trust (UBT), based in Washtenaw and Lenawee counties, has been with UBT since it opened in 2001. He notes how local banks are actually in a better position than the larger regional banks to help local businesses. “What we are seeing,” says Clark, “is that a lot of the larger regional banks aren’t as committed to lending as the community banks are. Their decision makers are not in the [local] markets, so they don’t understand the markets as well as those of us who are here every day. And to be honest, their commitments to the community are not as strong as those of us who are operating in the community every day.”

John Mann, CEO of Chelsea State Bank, agrees, “It’s becomes clear to me that the larger regional banks have tightened up their lending standards significantly in the Michigan markets. We have seen many more opportunities to lend to businesses that used to bank elsewhere because their regional or national bank has turned them away. The shots are being called from somewhere else in the country; they notice the problems Michigan has and allocate their resources elsewhere.”

Williaml Broucek, CEO of Ann Arbor State Bank, simply refers to corroborating numbers. “The statistics would show, at least in this county, the amount of banking business with the big banks is shrinking and the amount of business with local banks is increasing.”

This trend was played out even as we sought interviews for this article. When attempting to contact national bank executives, for example, we were funneled instead to an out-of-state PR office who promised to connect the executive and reply to us regarding possible interview dates. We received no return calls.

And the multiplication effect, as it’s called, is a message the local banks think is important to communicate to local businesses. Clark has put together numbers that demonstrate the impact UBT has had on the Ann Arbor area. “We really set out at the end of 2008 to educate the community to bank locally and keep deposits local and that way your money continues to work locally. It gets reinvested by the bank to reinvigorate the local economy.”

He gives this example. “Last year, we were able to grow our core deposits by $50 million, which was a tremendous number. But the interesting thing is that we were able to take a step back and reflect on how that money affected the community. We helped 668 families buy a new home in 2009. The interesting thing about that is when somebody buys a home, there’s title work that gets ordered, there’s an appraisal that gets ordered, the realtor makes a commission, there’s an insurance policy that is acquired. So you take all of those costs associated with somebody buying and selling house, and that generated about $10.9 million of those kind of fees that went right back into the community.”

“As you really start to think about the impact of people keeping their money local, and you follow it through, it’s amazing. We helped about 1,200 families refinance their homes, and so what does that do? That decreases their money payment so they’ve got more disposable income to continue to buy things in the community and invest in their kids’ education, and things like that. So those are things that we’re pretty proud of.”

The three bank executives we interviewed agreed that Washington can help. The SBA (Small Business Association) and USDA (U.S. Department of Agriculture) loans, for example, are extremely valuable for banks, in terms of sharing risk, and for the borrower, in terms of getting access to capital.

SBA loans are a vital part of keeping small and mid-sized businesses solvent or growing during difficult times. These SBA guaranteed loans ( are provided by banks and other institutions. The SBA simply guarantees a portion of the loan. While the SBA offers several other guaranteed loan programs, such as the CDC/504 Loan Program, the Microloan Program, and the Disaster Assistance Loan Program, the 7(a) Loan Program is the primary guaranteed loan program offered to small and mid-sized businesses. The name comes from section 7(a) of the Small Business Act that enables the SBA to guarantee the loans. According to the SBA, “The 7(a) Loan Program is SBA’s primary program to help start-up and existing small businesses obtain financing when they might not be eligible for business loans through normal lending channels. “

Banks work with a company to write a loan that is structured under 7(a) guidelines. If the loan is approved by the SBA, the bank and the SBA share in the risk of borrower default. Because the bank must state that it would only make the loan if the SBA guarantees it, the SBA tends to cover riskier loans for businesses that would otherwise not have access to the needed capital. This shared risk enables local banks to take on more loans to serve the community and keep local business running.

According to the SBA, “7(a) loans are the most basic and most commonly used type of loans. They are also the most flexible, since financing can be guaranteed for a variety of general business purposes, including working capital, machinery and equipment, furniture and fixtures, land and building (including purchase, renovation and new construction), leasehold improvements, and debt refinancing (under special conditions). Loan maturity is up to 10 years for working capital and generally up to 25 years for fixed assets.”

Ann Arbor area banks can provide borrowers these SBA loans, and they do. Clark describes how UBT has worked with SBA loans. “One of the core missions of [UBT] is small business lending. There are so many great tools that can help so many borrowers in the community that we decided to get very serious about it. You need a high level of expertise to do this kind of lending well, so we brought in a couple of individuals who are highly regarded in the SBA industry and within the state of Michigan and we started a company called the United Structured Finance. So, we’ve been able to hit the ground running and we’re proud of that.”

Clark gives another concrete example of what SBA loans can mean for local businesses. “Last year we had a company whose revenues were declining and whose cash flow was tightening. They came to us and said, ‘We’ve got a good plan for the future.’ The plan made sense, they just needed payment relief. We went to the SBA program and were able to restructure their roughly $2 million relationship to provide about $190,000 of cash flow relief per year. There are so many in the community who are pulling out all stops like this to get every viable company through this, and that’s just one example of how we’ve been successful at doing it.”

USDA Rural Business Programs (BP) is another popular loan program for more “rural” businesses outside of Ann Arbor, such as those in Chelsea and parts of Dexter. According to the USDA, BP “helps fund projects that create or preserve quality jobs and/or promote a clean rural environment. The financial resources of BP are often leveraged with those of other public and private credit source lenders to meet business and credit needs in under-served areas.”

Mann points to this program as a key program for area businesses outside of Ann Arbor. According to Mann, “The program has been in existence for a few years, but recently the program has received a lot more money and direction to move forward. We’ve made some loans to businesses and it’s guaranteed by USDA up to a certain percentage, depending on the unemployment level of the specific area. We have a number of loans in process and we closed our first new USDA program loan in December 2009. There are many others in process. It’s a good program.”

At present, a number of banking-related proposals are on the table in Washington. Some would be helpful, such as boosting the SBA Express loan cap to $1 million. But a number of other possible programs get mostly yawning reviews from our executives. Ideas such as recycling the $30 billion of the remaining TARP funds to banks with assets under $10 billion to help stimulate lending, the creation of a new Consumer Financial Protection Agency (CFPA) to supposedly centralize regulation, as well as the proposed $5,000 worker tax credit for new job creation, are not being met with open arms by many local banking leaders.

Broucek, for example, explains the problem with the $30 billion fund allocation. “It’s a preferred kind of stock that matures in five years. You have it, you have to pay 5% interest, and you have to pay it back in five years. It’s a temporary solution but most business loans go on a lot longer than five years. So what happens if you loan all that money out and in five years the government comes back and says, ‘OK, it’s now it’s time to pay it back.’ One, you’ve had to pay them 5% along the way, and five percent is a high rate when you’re talking about loans to small businesses. On top of that, you’ve got to operate the bank, put in money in the loan loss reserve, and make a profit for your shareholders. So, if you pay 5% on your money, the rate that you would charge a small business is something near 8%-10%. That’s not very attractive to a small business. So this program isn’t going to work.”

And Mann addresses the problem with the proposed CFPA. “The biggest negative that’s coming out of Washington now,” cites Mann, “is all this talk about a Consumer Financial Protection Agency. The administration is proposing to put a brand new layer of regulatory expectations on all financial services firms, including banks. Community banks did not cause the mortgage crisis, nor did we have anything to do with the economic meltdown at AIG, Bear-Sterms, or other Wall Street firms. As a banker, we are already regulated to the 99th degree – we don’t need more regulation. Add or improve regulation over the non-bank financial service providers, fine. But the last thing community banks and our customers need is more regulatory burden.”

2009 was a brutal year. Most agree the worst is behind, but few think 2010 will be much better than sluggish. Broucek is mild in his prediction. “We’re coming out of the recession,” he states, but very slowly around here.”

“I think the speed at which we move is largely dependent on the automobile business,” Broucek notes, “which is, in fact, getting better but it’s getting better slowly. There is still a lot of unemployment and still a lot of fear. I think there’s more fear than unemployment driving the economy because I think a there’s a lot of people with money who just aren’t going to spend it yet. They’re just hunkered down until they feel confident again, and our friends in Washington don’t make anybody very confident with the things they say and do. So, I think the country is living with a great deal of economic fear.”

This fear is driven, in large part, by the drop in home values. Commercial development companies, and the banks who loaned to them, were hit hard by the fall. Mann saw this at his bank. According to Mann, “Where we’ve been particularly impacted is in residential real estate development loans. Not so much in single-family mortgages. We’ve had surprisingly few problems there. Our problem loans really rest in just a handful of real estate development companies. Real estate development was going gangbusters until just a year or two ago. Now cash flows from lot sales and appraised values have fallen off significantly. But we are beginning to see activity again.”

“Our business is actually going well,” continues Mann, “although we did post the first loss in anyone’s recollection for yearend 2009. We are 112 years old, and we have been a consistently strong and profitable bank. But because of the sustained economic downturn, we’ve had some loan quality issues resulting in significantly higher provision for loan loss expense. So, we added roughly $3.1 million to our loan loss provision last year, even though we only wrote off around $1.5 million.” It was a very small loss, we’re still a very high capitalized bank, and we’re still strong in the commercial loan business. That’s our primary lending focus.”

Clark is guardedly optimistic. “We’ve been very successful in the community,” Clark comments. “And I think the community has benefited from us being successful. Obviously, it’s been tough sledding for everybody in the financial services industry over the last few years. We have earned out way through this. We, like everybody else, have experienced the deterioration in real estate values which serve as collateral for some of our loans, while unemployment rates have definitely impacted our clients. But I guess the bottom line is that we are doing everything we can to get every viable company and consumer through this.”

For now, local businesses are focused on managing cash flow for 2010. If you’re actively looking for funding sources, we’ll leave you will three final thoughts from these local bank executives:

Clark: “There still remains a lot of uncertainty, although I think the worst is behind us. But, I would tell you, if you’re going to be anywhere in the state of Michigan, the Washtenaw County area is the best place to be. So we’re lucky that way.”

Mann: “For most of this area, western Washtenaw County and eastern Jackson County, businesses are eligible for USDA funding. Since the program is available for any business in the area, it’s a great capital resource.”

Broucek: “Don’t get discouraged. The first bank you talk to may or may not have the dollars and interest to accommodate your needs. But don’t hesitate to go talk to another bank. The big banks around here are trying to out of Michigan, not into Michigan. And for the little banks, some are ‘loaned up,’ but there are several who are not. So, keep trying and you may just find someone who can help you out.

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