The Lending Tree

Uptick in business loans drives an economic revival acrossMichigan
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Illustration by Jacqui Oakley

At a recent Goldman Sachs conference, Stephen D. Steinour — chairman, president, and CEO of Huntington Bank based in Columbus, Ohio — was asked where he would invest money if he had his pick of any place in the United States. “I said Michigan, and even the guys that were sleeping woke up,” Steinour says.

Asked to elaborate, Steinour described a scene from a strategic retreat in Troy that was attended by Huntington’s leadership. “Some of our board members were skeptical about our expansion into Michigan, but after a number of CEOs came through and made presentations, including (Amway President) Doug DeVos, it turned out to be a seminal moment,” he says.

“It was just unbelievable to hear the depth of commitment and the hopes and aspirations for the state. You have a lot of multigenerational families that are incredibly passionate about their businesses. I can tell you we don’t see that same passion in many other areas of the country. Michigan has hit bottom, and it’s coming back.”

As the state strives to rebound from the loss of thousands of jobs and population over the last decade, no one is breaking out the champagne. Still, it’s clear, even among outside economic observers, that Michigan has emerged from “recession” into “recovery,” although it hasn’t yet reached the “expansion” phase.

Sophia Koropeckyj, a managing director at Moody’s Analytics in West Chester, Pa., says a number of positive signs, including employment and investment statistics, convinced her in March to officially upgrade Michigan’s status. “Employment began to turn around in Michigan in the second half of 2009,” she says. “Through March 2011, the state has made up 10 percent of the jobs it lost since 2000,” she says. “It’s got 90 percent more to go before one can say it’s actually in an expansion.”

Koropeckyj says personal income in Michigan rose 2.8 percent in 2010, after dropping 3 percent in 2009. Personal income has been steadily driven by transfer payments (unemployment insurance claims, Social Security, etc.) since 2008, but wages are now trending upward because more people are back to work. Lower unemployment (10.3 percent in early 2011 vs. 14 percent in 2009), and growth in industrial production and applications for residential building permits, also is a positive sign. “This is a cyclical rebound from the very deep recession. We’ve actually seen retail spending improving and retailers expecting better conditions this year,” Koropeckyj says.

Another sign that may foretell a healthier economy is the increasing number of loans approved by banks across the state that are guaranteed by the U.S. Small Business Administration. SBA loans, which are underwritten by the United States government and targeted at companies with a maximum
net worth of $15 million, or $5 million net income (averaged over two years), generally fall into three categories:

— Under the 7(a) Loan program, the SBA guarantees up to 85 percent of loans up to $150,000, and 75 percent of loans from $150,001 to $5 million.

— The 504 program guarantees 40 percent of a project up to $5 million, with the bank and borrower making up the balance.

— Short-term Microloans, which are now limited up to $50,000.

 

In the case of 7(a) and 504 loans, a bank deals directly with the customer and extends the loan. The government guarantees a certain percentage of the amount, depending on the type of loan, and charges a “guarantee” fee that the bank passes through to the borrower. With a Microloan, the SBA provides a loan to an intermediary organization that re-lends it to a business. No guarantees are involved.

In FY 2010, which ended in September, the SBA guaranteed 1,614 loans to small businesses in Michigan, up from 1,233 in FY 2009. Meanwhile, the dollar value of all Michigan SBA loans made last year rose to $478.6 million, from $310.7 million in 2009.

Of that, 7(a) loans rose 30 percent in 2010, to 1,406, and 7(a) loan dollars swelled 63 percent to $383.6 million, as compared to 2009. Also in 2010, the Small Business Administration approved 208 of the 504 type loans in Michigan, totaling $95 million. This amounted to a 37-percent hike in loan volume, and a 27-percent increase in dollar value over 2009.

“What I’m seeing now is encouraging,” says Allen Cook, assistant district director for lender relations in the SBA’s Detroit office. “Our loan application volume and activity are still better overall than the Midwest in general, and the nation as a whole. Figures for the first six months of FY 2011 are up quite a bit over 2010.”

Cook says the SBA benefits borrowers and banks alike. “Some lenders are willing to look at a startup only if they can get SBA guarantees,” she notes. “If collateral is weak but everything else is strong within a loan proposal, lenders like to use our guarantees to shore up the collateral position within the loan. If the business needs a little bit longer to pay back the loan than the lender normally can provide, they’ll use our guarantee to provide those longer terms.”

The 2009 American Recovery and Reinvestment Act (Stimulus bill) and the Small Business Jobs Act signed by President Obama in September 2010 sweetened the SBA’s loan programs — for a while. Those measures temporarily waived the fees (up to 3.5 percent) the SBA charges banks to participate in a guaranteed loan, and raised the loan guarantee limit to 90 percent through December 2010. The Small Business Jobs Act permanently increased loan limits under the 7(a) and 504 programs to $5 million from $2 million, and permanently raised Microloan limits to $50,000. “While we saw a bit of a slowdown in January and February after the Recovery Act provisions ran out, it looks like things are beginning to rebound again,” Cook says.

 

While 2010’s results are promising, they lagthe 3,314 loans totaling $496.1 million that the SBA guaranteed in Michigan in 2007. However, some experts say it’s unclear whether the increased loan activity will translate into net growth. Another concern is whether the temporary provisions, sweet as they were, will have had the same effect on economic activity as the Cash for Clunkers vehicle scrappage program had in 2009. A 2010 study by the University of California, Berkeley and the University of Chicago concluded that Cash for Clunkers simply pulled vehicle purchases forward from the near future.

Bankers say the SBA has the right tools at the right time to juice Michigan’s economy. “[They] allow a bank to lend more than it might be able to do otherwise on the same kind of collateral,” says Greg Wernette, executive vice president and chief lending officer for Level One Bank in Farmington Hills, a community bank that made nearly $3 million in SBA 7(a) loans last year. “The 504 program allows you to advance up to 90 percent of the appraised values, whereas most banks are going to advance only 70 percent to 80 percent,” he says.

Small business loan payments are typically based on a 15- to 20-year mortgage amortization, and the loan renews every five years. SBA loans offer 10-year terms and up to 25 years amortization, which can lower payments and increase a company’s cash flow.

Some bankers say the decline in business loans during the 2008 economic recession was mainly a function of demand — that businesses that survived into 2009 were too busy trying to stay alive to think about borrowing money. One lending officer says loan applications “fell off the map.”

But the supply-side played a role, as well. While bankers may not have necessarily tightened lending standards, devalued real estate and other market mechanisms conspired to limit how much money they could offer. To the extent that small businesses were gaining steam, many entrepreneurs decided that drawing from the SBA’s well could be a smart and assessable alternative.

Alex Burkulas chose Level One Bank in Farmington Hills for an SBA loan in 2010. The president and CEO of Cygnus Systems Inc., an IT services and support company in Taylor with 25 employees, says revenue in the first quarter rose 30 percent from the same period in 2010. He forecasts an increase of 20 percent to 25 percent in the next year.

 

“Over the past two to three years, the bank (we had worked with) said we couldn’t maintain a line of credit as a result of what’s happening in the economy,” he says. “After realizing that we needed that line of credit to help us maintain our growth, we started exploring other options. The banks that had been around a long time were quite a bit more rigid in terms of what they were able to offer based on the economy. Level One had a fresh approach, including the option of a small business loan through the SBA. We worked with them to refinance our building at a better rate and expand a line of credit for working capital.” Jon Carlson, founder and manager of Northern United Brewing Company in Ann Arbor, says he had his best year ever in 2010. Carlson had spent over a decade successfully rehabilitating vintage buildings in Traverse City, Ann Arbor, and Royal Oak into a network of restaurants, cafes, and nightclubs, and planned to expand into manufacturing Michigan-based beer, wine, and spirits. Northern United Brewing refinanced most of its long-term debt in the secondary market to take advantage of non-recourse loans and long amortizations, but when the economy bottomed in late 2008, that market crashed.

“We finished our business plan in 2008 to build these manufacturing businesses, and the banks we’d dealt with for 15 years said they weren’t lending,” Carlson says.

Turning to a consortium of local banks for SBA 504 and 7(a) loans allowed Carlson to fund $10 million in construction and equipment purchases in Ann Arbor, Dexter, and Traverse City. “Because of those loans, we now employ 250 people at these new businesses,” he says. “Right now we’re looking at buying an 80,000-square-foot plant facility. The only way it’ll work is if we work with the SBA.”

Small business lending, and cautious confidence, “are” on the rise at large banks, as well. Fifth Third Bancorp, which has 223 branches in Michigan, processed 81 SBA 7(a) loans in Michigan in 2010, and had the second highest dollar amount: $28.3 million. That’s more than double from 2008, when Fifth Third Bancorp booked 54 7(a) loans totaling $13.1 million.

“We had a great year in SBA lending last year,” says Brian Black, senior vice president, business banking group, at Fifth Third. “We were able to do some loans that, without that kind of support, we probably could not have done. It helped us get comfortable with companies that were in the earlier stages of recovery. Now we’re starting to see … more meaningful sales growth. As we look at new pieces of business, it would be very rare that we don’t have [up to] five banks bidding on the business. That’s a dramatic turn from where we were 12 to 18 months ago.”

Across town, Comerica Bank in Detroit, with $20.5 million in 2010 7(a) loans compared to $12.8 million in 2008, also expresses cautious optimism. “The SBA is the reason we’re seeing the lift. It’s due to real estate values declining or companies that have been fortunate enough to get to the other side of this economic downturn, but their financial condition may be somewhat impaired as a result, and they just need a little bit more assistance than they otherwise would,” says Mike Cope, Comerica’s senior vice president, business banking. “In this current environment, it would be very difficult to operate without the SBA. If I look over my 26 years in commercial lending at Comerica, the importance of these programs over the past few years has never been higher.”

 

Many experts see light at the end of the tunnel, but most agree it will be a while before Michigan bursts into full daylight. Still, Steinour and Huntington Bank are optimistic. Last year, the bank was the state’s largest provider of 7(a) loans — 262 loans that totaled $52.7 million. The company also committed $2 billion in capital in June, and is “raising its profile in Michigan,” Steinour says. The bank recently hired Mike Fezzey, former president and general manager of News/Talk 760 WJR, to be president of its southeast Michigan region.

The National Federation of Independent Business’s Small Business Optimism Index, which tracks 10 indicators every month ranging from hiring to credit availability, had been hovering in the mid-90s earlier this year, but dropped to 91.2 in April. It had been in the 96- 98 range for most of 2007 and reached its most recent high of 103.7 in October 2005.

“With a few ups and downs, the overall direction has been generally positive for the past several months. There is not one single component that is particularly encouraging,” says William Dennis, senior research fellow at the NFIB Research Foundation. “The index tells us Michigan
is still coming out of a recession, but it’s going in the correct direction.” db

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