Ann Arbor lenders choosier about loans as they build cash reserves

The disappearance of traditional, large national lenders is not unique to Michigan, financial experts say, but it leaves creditworthy borrowers scrambling to find alternative sources of capital.

Speaking at an Urban Land Institute forum at the University of Michigan earlier this month, Dennis Bernard of Bernard Financial Group in Southfield summed up the current situation.

"There's an absolute dearth of national lending," he said. "This is not just a Michigan phenomenon, it's on a national level."

Local community banks, buffeted by credit quality concern on existing loans due to falling property values, continue to lend and are even increasing their total loans. United Bank & Trust's average loan balance has grown 5 percent year-to-date compared to 2008, it's most recent quarterly report showed. At the same time, however, its net loans at the end of September of $649 million was a decline from the same time a year before of 2.9 percent.

Bank of Ann Arbor's net loans of $371 million as of Sept. 30 was an increase of $30 million compared to same time in 2008.

But leaders of both banks said a combination of lagging demand and falling credit quality of potential borrowers have limited the number and amounts of loans they're able to make.

Bob Chapman, president and CEO of United Bancorp, said the collateral many local borrowers are able to offer - namely property - is simply worth less than it was just a year ago.

"The collateral value they once had is just not the same," he said.

At the UM/ULI Forum, Tim Marshall, president and CEO of Bank of Ann Arbor, also said the credit quality of potential borrowers has taken a hit in recent months.

Both banks have also had to set aside more money to cover potentially bad loans in the most recent quarter. Bank of Ann Arbor, which saw a net profit through nine months of $1.8 million, increased its provision for loan losses from $3.2 million in the first three quarters of 2008 to $5.2 million so far this year. United Bank and Trust put aside $26 million for loan losses through September, up from $14.3 million in the same period a year ago. It lost $2.89 million so far this year.

United Bank & Trust also has embraced Small Business Administration lending as a growth strategy. And mortgage origination also has helped the banks' bottom lines.

Larger banks with greater lending capacities are not coming to the rescue of potential borrowers. For example, Comerica Bank, which moved its headquarters from Detroit to Dallas in 2007, is also shifting its lending focus toward Texas, according to publicly available presentations to investors.

Through three quarters of this year, Comerica's commercial real estate lending has fallen to $3.33 billion from $3.94 billion in the same period in 2008, a decline of 15.5 percent. In Michigan, however, lending has fallen 21.5 percent in the same time, from $396 million to $311 million. That means Michigan lending has fallen from more than 10 percent of Comerica's total to 9.34 percent.

During the same period, the bank's commercial lending in Texas rose from $916 million to $1 billion.

Jeff Kleinschmidt of Colliers International, whose job is to find capital for prospective real estate borrowers, said many lenders are not only wary of Michigan, but of the entire upper Midwest, including Indiana and Ohio.

"We don't have a lot of demand drivers for employment," he said. "Several states, not just Michigan, have been taken off the map."

That leaves private equity and funds spun off from traditional banks to fill part of the void, Kleinschmidt said. Foreign investors are also coming to America, finding more favorable terms now than when the lending markets were more active, he said.

At the same time, those lenders that are doing business are giving borrower more scrutiny, Kleinschmidt said. He agreed with the idea, voiced at the ULI Forum, that loan-to-value ratios are fading in importance in favor of cash flow vs. debt service calculations when lenders evaluate borrowers. But he also said lenders are looking at a borrower's entire portfolio of holdings rather than basing a lending decision on a single property.

"They're looking at cash flow on a portfolio level," he said. "They want to know if there are any other problems in a portfolio that might dilute the quality of the transaction."

Kleinschmidt added that lenders are either interested in Michigan, or completely staying away.

"You're either in the market or not. There's no in-between," he said.

Freelance reporter Dan Meisler can be reached at danmeisler@gmail.com.